minimize the economic effects of the terrorist acts and to limit the loss of confidence at home. since last september, we have cut our overnight rate target by 200 basis points, bringing the total reduction since the beginning of 2001 to 375 basis points. the substantial monetary easing undertaken in 2001 will have its maximum impact as we move through this year and into 2003. in addition, tax cuts implemented at the beginning of last year continue to provide significant support to the canadian economy. further stimulus will also come from spending on enhanced national security. thus, both monetary and fiscal policies are providing very significant support as we move forward. moreover, with the improvement since the fall in the geopolitical climate and in consumer confidence in north america and europe, there are increasing signs that the global economy has turned the corner and will firm as the year progresses. for these reasons, the bank of canada expects that the canadian economy will gain momentum through 2002. after growing modestly in the first half - by 1 to 2 per cent, on an annualized basis - it should accelerate in the second half - to something like 3 to 4 per cent - and strengthen further in 2003. once our economy starts expanding at rates exceeding the growth of potential output later this year, the considerable amount of slack that has built up over the past several months will begin to be absorbed. still, it could be late 2003 before the actual level of output in the canadian economy will again reach its potential level. this implies that core inflation will probably average just under 1 ½ per cent in the second half of 2002. total cpi inflation is expected to stay below the core rate until late 2002, if energy prices remain near their current levels. given the profile for output growth, the bank expects inflation to move back up to 2 per cent in approximately two years. recent economic indicators for canada support the view that a recovery is starting. household spending, particularly on interest - sensitive purchases, has been stronger than expected. exports have lately shown signs of revival. the inventory adjustment is progressing. and with early evidence of a firming u. s. economy, the world prices of non - energy commodities appear to have bottomed out. moreover, the national accounts data for canada may well show slightly positive economic growth in both the last quarter of 2001 and the first quarter of this year. all available indicators suggest that final demand in the fourth quarter was stronger than anticipated. and the healthy employment data for january suggest that this strength is continuing. also notable is the fact that production,

because of that lag, in setting policy, one wants to emphasize those changes in prices that affect the underlying trend of inflation and downplay temporary fluctuations in very volatile components of the consumer price index. that is why, unlike some other central banks, we have explicitly chosen to focus on the underlying trend of inflation and use a core rate as our operating guide. the core rate excludes the eight most volatile components of the consumer price index as well as the effects of changes in indirect taxes. but i should add that the central bank can downplay those temporary price changes only if there is good reason to believe that they will not feed into other prices in the economy and affect inflation expectations. the reason we have been able to do that is because the inflation targets have helped to establish monetary credibility and to anchor inflation expectations. inflation targeting and a flexible exchange rate my review of canada ’ s current monetary policy framework would not be complete without reference to its other key element - our flexible exchange rate. monetary policy can pursue only one objective - keeping inflation low as a means to promote the economic well - being of canadians. in pursuing that goal, we have chosen an inflation target as our anchor. and that means that we have to have a floating exchange rate. but i want to emphasize that canada is a small and very open economy, with a structure of production and trade that differs significantly from that of the united states. a floating exchange rate is important because it facilitates the adjustment to economic disturbances, such as fluctuations in the world demand for, and prices of, our products. it also facilitates adjustment to changes in savings and investment flows. over the last few years, more countries around the world have moved to flexible exchange rate systems and have adopted inflation targets as their monetary policy anchor. today, i have given you a flavour of the canadian experience in this area, and i have talked about some of the lessons we have learned over the past decade. i hope that this has provided you with some useful insights. let me now turn to recent economic developments and the outlook for the canadian economy. recent economic developments and prospects in canada the immediate impact and the fallout from last september ’ s tragic events here in new york, and elsewhere in the united states, led to a sharp increase in economic uncertainty around the world, exacerbating the effects of the global economic slowdown that had become more evident by last summer. in those circumstances, the bank of canada moved quickly and aggressively to lower interest rates. the aim was to