david dodge : inflation targeting during a difficult year remarks by mr david dodge, governor of the bank of canada, to the saskatoon and district chamber of commerce saskatoon, saskatchewan, 29 january 2002. * * * thank you for the opportunity to speak to you this morning. as you may know, the end of this week will mark the first anniversary of my appointment as governor of the bank of canada. it was an honour to be appointed, and it has been a privilege to serve canadians in this role. i have had the opportunity to work with an extraordinarily talented group of professionals at the bank, as well as a supportive board of directors. together, with input from canadians across the country, we have worked hard to conduct monetary policy as well as we could during rapidly changing, and increasingly difficult, economic times. as i come to the end of my first year as governor, it seems natural to look back and review some of the challenges and changes that have marked the past 12 months. the main economic concern of the past year was the slowdown that occurred not just here in canada, but in most major economies. compounding the economic concerns were the 11 september terrorist attacks in the united states. inside the bank of canada, there were some major developments as well. two things in particular stand out for me. we went through our first year with our new system of fixed announcement dates for interest rate decisions, and we renewed our inflation - control agreement with the federal government. yesterday in winnipeg, i spoke about our fixed announcement dates. today, i'd like to talk to you about our inflation - control target system. then i'd like to take a few minutes to review the current state of the economy and touch on canada's economic outlook. renewing the inflation - control targets last may, the bank and the federal government jointly announced the renewal of our inflation - control agreement. this was an important decision. it strengthened a policy framework that has given our economy low, stable, and predictable inflation for the past decade. one of the main benefits of the targets is that they help the economy to run more smoothly when there are surprises in the level of demand for canadian goods and services. let me elaborate. under the agreement, the bank of canada aims to guide total consumer price inflation towards the 2 per cent midpoint of our 1 to 3 per cent target range over the medium term. so when demand for goods and services leads the canadian economy to push the limits of its capacity,

as possible, which would help the economy recover as quickly as possible. that is why in the days following the attacks, we took the extraordinary step of lowering interest rates outside our fixed announcement dates. it then became clear that the economy would continue to operate below its capacity throughout 2002, with resulting downward pressure on inflation. so we sped up the pace of interest rate reduction at the next two fixed announcement dates. we wanted to support economic growth, which would help keep inflation within our target range of 1 to 3 per cent. the terrorist attacks created all sorts of uncertainties — economic, political, and military. so it was extraordinarily difficult last fall to be very certain about the future track of the economy. now however, a clearer picture is beginning to emerge. the current economic situation and outlook one way for us to get that clearer picture is to actually get out across the country to see what is going on in canada's regions. these opportunities to get away from the frenetic world of financial markets, and to see what is happening in the real economy, are extremely important to me, and to the bank. let me focus on this province for a moment. here in saskatchewan, the impact of a slowing world economy was felt mainly through a weakening in commodity prices. this hurt not just the agricultural sector, but the important mining sector as well. after posting very modest growth in 2001, saskatchewan's economy is expected to show an improvement this year. a pickup in the global economy should boost commodity prices, which would be a big help to the province. saskatchewan's agricultural sector would also be helped by a return to more normal weather patterns. there is an old farming saying that you can't lose a crop in january. but there is a clear critical need for more moisture in the soil and we all hope it comes soon. of course my predecessor, gordon thiessen, has strong roots in this province and he understood well the difficulties faced by farmers year in and year out. but i want you to know that i too can relate to the trials of farming. i have a small cow - calf operation outside ottawa, and i know how difficult this business can be. we can try to do something about the economy at the bank of canada, but sadly, we can't do anything about the weather. one clear positive for saskatchewan has been the fiscal record of the provincial government, which is currently projected to post an eighth consecutive surplus. this strong fiscal record can only