, we try to determine the degree to which those movements are due to changes in world demand for our goods and services, and how much is due to other, unrelated factors. it is important that we understand the causes of exchange rate movements, because the implications for the economy – and the appropriate monetary policy response – depend on the reasons for the change. we must then incorporate this information with our assessments of other data, and set a course for monetary policy that works to keep total demand and supply in balance, and inflation on target. exchange rate movements can also be, as we have seen recently, quite volatile. that has sometimes led to calls, for example, for canada to fix its currency to the u. s. dollar. that would be a mistake. the united states is certainly our closest neighbour and by far, our largest trading partner. but the structures of our two economies are very different. this means that each of us often requires different adjustments and different policies in reaction to shocks. canada's floating exchange rate helps in this process by acting as a shock absorber. we cannot avoid adjustment ; the question is how we can best adjust to changing global and domestic economic forces. with a fixed exchange rate, the adjustments would have to come through movements in overall output and in all wages and prices. history has shown that those adjustments are more protracted and more difficult when the nominal exchange rate is not allowed to move. again, however, i stress that this does not mean that the bank is indifferent to movements in the exchange rate. now, let me conclude with a few summary comments on our latest monetary policy report update released last week. copies are available for committee members. in this, we said the canadian economy continues to operate above its production capacity, despite some slowing in growth in the fourth quarter of 2007. the bank projects that economic growth in 2008 will be weaker than was expected in october, averaging a little over 1 per cent in the first half of this year and a little over 2 per cent in the second half. on an average annual basis, the economy is projected to expand by 1. 8 per cent in 2008 and 2. 8 per cent in 2009. both core and total cpi inflation are projected to fall below 1 1 / 2 per cent by the middle of this year before returning to 2 per cent by the end of 2009. on 4 december and on 22 january, the bank lowered its target for the overnight rate by one - quarter of one percentage point, bringing it to

mutually reinforcing. examples just mentioned include clearing houses for cds and basel ii treatment of basis risk or new liquidity requirements and the development of continuously open funding markets to aid in liquidity options. reforms cannot be developed and introduced in a piecemeal fashion ; the entire package must be integrated. similarly, banks should take an integrated approach to how they deploy their current earnings. in this regard, it may be wise to consider that both the basel committee and the g - 20 are stressing capital conservation during the transition to a new capital regime. the compensation debate should be seen in this context. current bumper profits can compensate employees, be returned to shareholders, or increase capital. the clear priority of the public sector is the recapitalization of the financial system to expand credit formation. the transition timetable for a new capital regime referenced at the start of my remarks is in part designed to take advantage of current higher retained earnings. the industry should be in no doubt that capital requirements are going up. those who pre - fund will be in the best possible position over the medium term. moreover, we all agree that bonuses should be tied to long - term performance. in their communique, the g - 20 leaders urged firms to implement sound compensation practices immediately. the current windfall, dependent as it is on the strongest of safety nets and the policy - driven snap back from the brink, sits uneasily with that principle. do firms really have a good handle on their medium - term profitability, given the profound regulatory and economic changes on the horizon? conclusion : working together for common solutions to conclude, the financial system must transition from its self - appointed role as the apex of economic activity to once again be the servant of the real economy. stronger institutions and a system that can withstand failure are necessary conditions. but full realization of this objective also requires a change in attitude. the bank of canada has a strong preference for principles - based regulation and reliance on the judgment of people, rather than blind faith in the security blanket of excess capital. but this approach requires a sensitivity from the industry, which has been absent in recent months. relief is in danger of giving way to hubris. financial institutions need to demonstrate an awareness of their broader responsibilities. financiers should ask themselves every day how their activities affect systemic risk? and what are they doing to promote economic growth? as a colleague said during the crisis, there are no atheists in foxholes, and there are no ideo