9 per cent in the third quarter, reflecting large year - on - year drops in energy prices. total cpi inflation should rise to 1. 0 per cent this quarter, while the core rate of inflation is projected to reach its trough of 1. 4 per cent during the same period. owing to the substantial excess supply that has emerged in the economy, the bank expects both core and total inflation to return to the 2 per cent target in the third quarter of 2011, one quarter later than we projected in july. the main upside risks to inflation relate to the possibility of a stronger - than - anticipated recovery in the global economy and more robust canadian domestic demand. on the downside, the global recovery could be even more protracted than projected. in addition, a stronger - than - assumed canadian dollar, driven by global portfolio movements out of u. s. - dollar assets, could act as a significant further drag on growth and put additional downward pressure on inflation. on tuesday, the bank reaffirmed its conditional commitment to maintain its target for the overnight rate at the effective lower bound of 1 / 4 per cent until the end of june 2010 in order to achieve the inflation target. the bank retains considerable flexibility in the conduct of monetary policy at low interest rates, consistent with the framework that we outlined in the april mpr. as i said last week, our focus in the conduct of monetary policy is on achieving the 2 percent inflation target. the exchange rate should be seen in this context. it is an important relative price, which the bank monitors closely. what ultimately matters is the exchange rate ’ s impact in conjunction with all other domestic and foreign factors on aggregate demand and inflation in canada. to put it simply, the bank looks at everything through the prism of achieving our inflation target. current macrofinancial environment as many of you have no doubt noticed, it is currently a very constructive environment for financial institutions. flow trading and market making have become more attractive and intermediation spreads have increased. underwriting fees have recovered along with the capital markets ; and there are very early signs that an appetite for mergers and acquisitions has returned. banks are once again being compensated for their basic businesses of providing liquidity and credit. interestingly, despite the fall in measured volatility, industry var, while down from the peak earlier this year, is still above pre - lehman levels. what is perhaps less evident is that these returns are largely the product of public policy. while medium - term challenges clearly remain

banks have taken measures to stimulate their economies. bond yields are lower, and the yield curve is inverted in many countries. an inverted yield curve means that short - term interest rates are higher than long - term rates. this is the opposite of how the yield curve normally looks because longer - term lending is usually considered riskier. historically, an inverted yield curve has been viewed as a sign of a future recession, especially in the united states. today, with interest rates so low to begin with, an inverted curve is more likely a sign that investors foresee weaker long - term growth. the canadian economy in contrast to the global economy, canadian economic data since july have surprised on the upside. last week, we received the national accounts report for the second quarter. it showed the economy grew at a pace of 3. 7 percent, much stronger than we had forecast. among the highlights from the report was labour income, which grew by 7 percent, reflecting continuing growth in employment and hours worked and a notable pickup in wages. that rise in income, along with the lower interest rates i mentioned earlier, helped support unexpected strength in housing. in fact, most people renewing a five - year fixed - rate mortgage today are paying a lower interest rate than they did five years ago. housing is once again contributing to growth, with resales and starts catching up to underlying demand. high levels of household debt remain the main risk to canadian financial stability, but with tighter mortgage rules in place, the quality of the stock of household debt should continue to improve. however, consumption was surprisingly soft in the quarter, particularly given the increase in labour income. and the national accounts data suggest that some of the economy ’ s strength will be temporary. exports were very strong, but much of that came from a sharp rebound in shipments of crude oil and transportation equipment. imports were surprisingly weak, and companies are still carrying high levels of inventories. business investment contracted sharply after a strong first quarter, likely reflecting, in part, the impact of the escalating trade war. the stronger second - quarter growth means that the economy was operating close to its productive capacity, or potential — a concept i will explain in a minute. and inflation has been very close to our 2 percent target. inflation and the phillips curve now, let me spend a few minutes on the relationship between inflation and economic growth. this issue has been in the news lately because inflation rates in the united states, the euro area and japan have stayed low, even