at 2 per cent, the midpoint of a 1 to 3 per cent target range. let me stress a few points about our inflation - targeting system. first, our commitment to inflation control is the best way that the bank of canada can contribute to high sustainable growth of output and employment. in other words, inflation targeting is a means to an end, not an end in itself. the second key point is that we operate in a symmetric way. we care just as much about inflation falling below target as we do about inflation rising above target. if demand for goods and services pushes the canadian economy against the limits of its capacity, and inflation is poised to rise above the target, the bank will raise interest rates to cool off the economy. and when the economy is operating below its production capacity, and inflation is poised to fall below the target, the bank will lower interest rates to stimulate growth. finally, inflation targeting is very important in terms of the bank ’ s accountability to the canadian public. if inflation persistently deviates from the target, we must explain why this has happened, what we intend to do to bring inflation back on track, and how long we expect the process to take. with the adoption of inflation targets, we have gained all the expected benefits, and even gained some that we weren ’ t expecting! let me list some of them. inflation has become more stable, averaging very close to 2 per cent, and private sector inflation expectations have become well anchored. importantly, our symmetric approach has also worked as an economic stabilizer, helping to smooth the peaks and valleys of the business cycle. businesses and individuals can make long - term economic plans with increased confidence about the future. and scarce economic resources are no longer wasted in efforts to hedge against the threat of either high inflation or deflation. moreover, with inflationary expectations well anchored, we have found that movements in the exchange rate have much less impact on inflation than in the past. this is because markets know that the central bank is committed to protecting the domestic value of the canadian dollar. because we have a clear objective, and because we explain publicly how we plan to meet that objective, financial markets can now better predict how the bank will react to different circumstances. at the same time, inflation targeting has brought increased discipline and clarity to policy deliberations inside the bank. let me make two more points about our inflation - targeting framework. first, our experience with inflation targets has also allowed us to see the importance of having an

anchor for fiscal policy. after the adoption of inflation targets in 1991, short - term inflation expectations came down quickly. but longterm expectations adjusted much more slowly, for a couple of reasons. it took some time for the bank to earn its credibility. but more importantly, the federal government also needed to address its fiscal problems. indeed, the bank of canada found that it could not be as accommodative as it wanted to be in its monetary policy during the first half of the 1990s because of the difficult fiscal position at that time. but by the middle of the 1990s, the government committed to ending a series of budget deficits and to putting canada ’ s public debt - to - gdp ratio on a sustainable, downward track. with that commitment, canada finally had anchors for both its monetary and fiscal policies. this now allows us to gear monetary policy more directly to our domestic economic conditions. the other point i want to make is that with these two policy anchors in place, the floating exchange rate can work more effectively for the canadian economy. it performs a very important function by helping the economy adjust to changing conditions. movements in the exchange rate send appropriate signals to businesses and consumers, helping the economy to adjust to changing circumstances. to take a recent example, when there is increasing world demand for canadian goods and services, this tends to lead to a stronger canadian dollar. the stronger dollar, in turn, tends to restrain exports and to encourage imports. in doing so, the floating exchange rate helps to maintain a balance between total supply and demand in the economy and that helps keep inflation under control. this process also works in reverse. the point i want to emphasize here is that with these policy anchors in place, a floating exchange rate can be a tremendous asset for an economy by helping to keep total supply and demand in balance. conclusion in closing, let me say again that canada has been a pioneer both in having a floating exchange rate and in operating with inflation targets. as a consequence, we have a lot of experience that may be of use to others who are contemplating changes to their monetary policy framework. canada ’ s long experience with flexible exchange rates has been very favourable, and a floating exchange rate continues to be a key part of our monetary policy framework. but our experience has also taught us that a flexible exchange rate on its own is not enough. a country also needs a domestic anchor for its monetary policy. after trying a number of different approaches, we have now settled on a monetary policy