cent over the medium term. inflation and the " output gap " our inflation - targeting system also helps to smooth the peaks and valleys of the business cycle and to avoid the boom - and - bust pattern seen in earlier decades. we do this by acting in a symmetrical manner ; that is, we pay equal attention to any significant movement in inflation away from the 2 per cent target, whether above or below. the crucial task in controlling inflation is to judge how the economy is performing relative to its economic potential. economic potential is a very important concept, so i want to take a minute to describe it. potential output, or production capacity, is the amount of goods and services that can be produced without putting pressure – in either direction – on inflation. when the economy is producing less than its potential, economists say there is an output gap. that gap tends to put downward pressure on inflation, so the bank will ease monetary policy to stimulate growth. we do this by lowering our target for the overnight interest rate. when the economy is operating above its potential, excess demand builds. this puts upward pressure on inflation, and the bank will tighten monetary policy to try to cool the economy, bring it back down to its level of production potential, and return inflation to the target. keep in mind that changes in our policy rate work their way through the economy slowly. it takes up to two years for a change in interest rates to have its full impact on demand, output, and ultimately, on prices and inflation. so we have to be forward - looking in our interest rate decisions. at our fixed announcement dates, we are not trying to affect today's inflation. what we are aiming at is future inflation and acting pre - emptively to achieve a balance in supply and demand going forward. this may sound easy in theory, but the reality is complicated. for one thing, it is impossible to measure the economy's potential with precision. all economists can do is to make their best estimate – a highly educated estimate, i might add, but an estimate nonetheless – of the level of economic activity that represents full capacity. and since one cannot measure potential with precision, it is impossible to measure the exact size of the output gap or the amount of excess demand. so the bank looks at a wide variety of indicators to assess how much pressure there is on capacity. we monitor statistics canada reports on how closely factories are operating relative to their capacity. we survey businesses across the country to see where firms are feeling production

years, the bank has been conducting analysis and research related to the canadian financial system, much of which has been published in the bank of canada review, and in technical reports and working papers. we are now prepared to take a further step in the interest of making the information about our financial system more widely available. i am pleased to announce that the bank of canada will introduce a new semi - annual publication, the financial system review ( fsr ). we are planning for the first issue to be available late next month. in it, we will publish some of the bank's ongoing work in monitoring financial system developments and analyzing the direction of financial sector policy. the fsr aims to promote knowledge of, and discussion about, changes and developments in the canadian financial system. i would point out that we are not the only central bank to publish such a document. for example, the bank of england, the swedish riksbank, and the international monetary fund also produce similar reports. promoting economic welfare through inflation control while we work to promote financial stability in conjunction with other agencies, we alone are responsible for monetary policy. the foundation for that policy is the inflation - targeting system. how this system works may be familiar ground for some of you, but it is worth discussing again, especially during these uncertain economic times. the bank of canada act calls on us " to promote the economic and financial welfare of canada. " we want strong and sustainable economic and employment growth. the best way we can help to achieve that is to promote confidence among canadians in the future purchasing power of their currency. in other words, we want canadians to be confident that inflation will remain low, stable, and predictable. for over a decade, following a joint agreement with the federal government, the bank has operated with a system of inflation - control targets. under the current terms of the agreement, the bank aims to keep the trend of consumer price inflation at the 2 per cent midpoint of a 1 to 3 per cent range. since we instituted the agreement, inflation expectations have become firmly anchored on our 2 per cent target. well - anchored expectations promote economic growth and stability. why? investors can better assess the future value of their investments. savers can be more confident that their future purchasing power will not be unexpectedly eroded by inflation. debtors can better assess the real burden of their interest payments. wage and financial contracts can be set for longer terms. all of this is possible because people are confident that inflation will stay around 2 per