Clearly, it is very important that we all continue to work to improve the structure of our economy and the skills of our labour force, and to ensure that our product and labour markets operate efficiently. It is also critical that over the next decade all levels of government continue to focus on reducing their net indebtedness to lessen Canada's vulnerability to external shocks and to prepare for the pressures we will face with the projected decline in our working-age population. Let me now turn to the role of the inflation-control targets and the floating exchange rate in Canadian monetary policy. Explicit inflation-control targets were jointly introduced by the Bank and the Government of Canada in 1991. Since 1995, the target has been to hold the trend of inflation inside a range of 1 to 3 per cent, with a focus on the midpoint of 2 per cent.
Inflation targets provide an anchor for policy and an anchor for people's inflation expectations.
They supply the Bank with an effective mechanism for assessing and dealing with demand pressures in the economy in a way that reduces fluctuations in output. Here's how this stabilizer' feature of the targets works bearing in mind that monetary policy actions take anywhere from one to two years to have their full effects on the economy and prices. If total demand was pressing on the economy's capacity to produce, so that the future trend of inflation looked likely to move towards the top of the target range, the Bank would tighten in order to reduce demand and inflation pressures. Equally importantly, in a symmetric fashion, if demand was weak and inflation looked likely to move towards the bottom of the range, the Bank would ease, providing more room for the economy to expand to its production potential. Moreover, the focus on inflation control can help the Bank to gauge where the economy's capacity to produce really is, especially after periods of widespread restructuring that may have raised capacity above the levels estimated on the basis of past experience.