gauge the strength of the economy as it approaches its capacity to produce and to reduce the amount of monetary stimulus in place in a timely and measured manner. what do we mean by those terms? " timely " relates to the fact that there is always a lag between our policy actions and their effect on the economy. we must be timely because our actions take a year to 18 months to have their full effect on output, and 18 months to 2 years to have their full effect on inflation. " measured " relates to the judgments that we will make as we approach full capacity. if the economic data going forward tell us that we are taking up excess capacity more quickly than expected, we would have to reduce monetary stimulus more quickly. but if the data suggest that the return to full capacity is going more slowly than we thought, we would then need to move more slowly. there are still important risks and uncertainties in the outlook. some are working on the upside and others on the downside. given the amount of monetary and fiscal stimulus in the economy, output growth could be even stronger than projected. but it is also possible that some of the recent strength in spending on consumer durables may have been borrowed from the future, so that the growth of household expenditures may be weaker than expected. at the same time, there is still considerable uncertainty about the timing and strength of the pickup in business investment in north america, mainly because of the continued weakness in profits. moreover, recent developments in the middle east could have implications for crude oil prices and the global economy. the canadian and u. s. situations on 16 april, canada became the first g - 7 country to raise interest rates following the most recent economic slowdown. central banks should always tailor their monetary policies to their own circumstances. and while canada faces many of the same risks as the united states, there are some differences in our situations that are worth noting. although the first - quarter national accounts data are not yet out in canada, we expect that final demand has made up a larger share of canada's growth in the first quarter, while the contribution to growth from inventories constituted a smaller share than in the united states. it is always difficult to measure excess capacity with precision. however, it is clear that the canadian economy is now nearer its level of potential than we expected it to be just a few months ago. the key issue facing both the u. s. and canadian economies is business investment — when it will resume and how strong that

stability of the financial system, of which the banks are a central component. it is natural that in a time of crisis and uncertainty, such as the present, the banks should exercise special caution in their credit policy. moreover, the supervisor of banks and i encourage the banks to be more careful and not to take unnecessary risks – – but this too must be to the right degree. hence it is essential that the banks, which are one of the most crucial elements in the economy's ability to continue to grow, strike the correct balance between their credit policies, which at this time must be cautious, and the needs of the economy, particularly the business sector, for finance. i am not speaking only about the supply of bank credit, but also about its cost. recently the bank of israel reduced the interest rate sharply, with the purpose of helping to lower the cost of credit to the business sector and households. in practice the banks hardly reflected these cuts in the cost of credit they offered. and here again, although in this special period spreads are expected to increase, it is important to maintain a sense of proportion and not act excessively. to put it another way, i repeat what i said to you in previous years, " good bankers can make good loans in bad times, " and i have every confidence that in this hall we have good bankers. as an economist, i would like to explain this issue by noting that this relates to externalities. thus, if all banks significantly tighten their credit policy the economy will grow more slowly, thereby retrospectively justifying the step they took. on the other hand, if every bank takes into account that even slight easing of its credit policy in its marginal decisions will make the economy grow faster, this will retrospectively justify their decision. one of the bank of israel's roles is to help to achieve the right balance. to do this we will, monitor the amount of credit each bank gives, among other things. we see no conflict between our responsibility to support the return of the economy to rapid, sustainable growth, and our responsibility to support the stability and strength of the whole financial system, and specifically of the banking system. the financial crisis is still with us, and is too soon to predict when it will end. we do know, however, that it will end, and the economy will return to growth rates similar to those of the last few years. hence the importance of not wasting valuable time. and i am saying this when the steps formulated