Demand in that country continues to steam ahead and to push hard against the limits of production capacity. And signs of price and wage pressures have become more visible. That is why the U.S. Federal Reserve has raised interest rates six times in the past 12 months to cool down the economy. In this connection, I would like to highlight a couple of important points that sometimes get lost in the public commentary. Monetary policy actions aim at future inflation First, monetary policy is concerned with future inflation pressures.
Monetary policy works with relatively long lags.
It takes between 18 and 24 months for a change in interest rates to work through the economy and have an effect on inflation. So, even though the underlying rate of inflation has been in the lower half of the 1 to 3 per cent target range, the Bank has to consider what is likely to happen to prices in the future. The next point I would like to stress is that Canadian monetary policy decisions focus, first and foremost, on the economic outlook here in Canada. So, the critical element is the Bank's assessment of the balance of forces at work in the Canadian economy, and what this means for future inflation. But if domestic demand was already rising rapidly, and the Canadian economy was operating at high levels, the spillover of strong U.S. demand would have the potential to strain our production capacity and lead to higher inflation in the future.