In addition, all levels of government must continue to reduce their net indebtedness. This is extraordinarily important if we as a nation are to become less vulnerable to external shocks and to prepare for the pressures of a shrinking working-age population. Let me now talk briefly about 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 goal has been to hold the trend of inflation inside a target range of 1 to 3 per cent, with emphasis 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. 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 future inflation looked likely to move towards the bottom of the range, the Bank would ease, providing more room for the economy to expand. The basic point here is that the focus on inflation control allows the Bank to support growth when the economy is weak and to prevent overheating when the economy is strong and is pushing against capacity constraints.