risk premiums in our interest rates sharply higher. during the recent asian crisis, however, with our public finances in better shape, and with clear, strong policy commitments by both the fiscal and monetary authorities, financial markets have been more stable and our longer - term interest rates have been falling. of course, pressures on the exchange rate can also be triggered by so - called “ real shocks ”. in canada, such shocks are frequently associated with swings in world prices of primary commodities. in cases like these, a flexible exchange rate can act as a “ shock absorber ”, allowing some of the necessary adjustments to the shock to take place through movements in the value of the currency. canada ’ s long - standing preference for flexible exchange rates has been driven largely by the benefits such rates offer in facilitating adjustments to external shocks. this is an important consideration for us, given our strong reliance on international trade and foreign savings. as a major exporter of primary commodities, canada has often been hit by sharp swings in the world prices of these products which, in turn, have caused large capital movements. indeed, the decisions to float our exchange rate in 1950 and again in 1970 ( after a short period of fixed exchange rates ), were related to strong inflows of foreign capital associated with a surge in commodity prices. in both cases, we chose to allow the canadian dollar to float up, rather than try to maintain a fixed exchange rate and risk a destabilizing inflationary monetary expansion. overall, i am persuaded that a flexible exchange rate regime is the best way for a country to take advantage of today ’ s integrated capital markets and to deal with the external shocks that arise from time to time. exchange rate fluctuations : is taxing currency transactions the solution? some critics have argued that integrated international financial markets have given rise to large, short - term speculative flows of capital that can cause unwarranted exchange rate pressures. such speculative transactions, they say, disrupt domestic macroeconomic policies, result in temporary misallocations of resources, discourage trade, and encourage further unproductive financial transactions as businesses and individuals seek to protect themselves. based on these arguments, some people have resurrected the idea of discouraging currency transactions using a tax similar to the one proposed by professor james tobin in the 1970s. the case for taxing global financial transactions rests on the notion that such a tax will discourage short - term flows, which are viewed as destabilizing, without affecting longer - term flows that

the canadian dollar rose to a 13 - year high of about 85 1 / 2 cents ( us ). this occurred despite the fact that world commodity prices had declined somewhat and the outlook for the global economy had weakened. the bank's target overnight rate was therefore left unchanged at the fixed announcement dates in december 2004 and january 2005. each monetary policy decision that we make is complicated by uncertainty about the persistence of exchange rate changes and about the length of time it takes for both exchange rate and monetary policy movements to influence the economy. this has been one of the bank's major challenges in the recent conduct of monetary policy. it's one thing to observe a movement in the exchange rate. it's quite another to determine its implications for aggregate demand and, hence, for monetary policy. we continue to struggle with the same complications today as we chart a path for monetary policy. canadian interest rates remain low by historical standards. eventually, this considerable monetary stimulus will have to be reduced ; that is, at some point, interest rates will have to rise. but as i said, the second type of exchange rate movement appears to have gained relative importance in recent months, which means that aggregate demand in canada will be weaker than we had expected last autumn. that is why in our recent update we slightly lowered our growth projection for 2005, to 2. 8 per cent from 2. 9 per cent. and it is why we said in the update that : " a€¦the pace of reduction in monetary stimulus is likely to be slower than envisioned in the october report. " by slowing the pace at which we will reduce monetary stimulus, we will continue to provide support for domestic demand to offset the additional drag we expect from net exports. conclusion let me conclude by reminding you of what i said at the beginning of my remarks today. the relationship between the exchange rate, the economy, and monetary policy is complex. and the effects of movements in the currency are spread out over time. you can't look at one day's or one week's performance of the canadian dollar and pinpoint the reason behind the movement. there is no precise way to measure the relative importance of the two types of movement that i have described, or their likely persistence. so, in setting monetary policy, we at the bank use an analytical framework based on historical evidence, assess a lot of current data and, even then, we must apply a lot of judgment to our analysis. and the analysis and the judgment can change