fifth in the past six months. no one who has lived through the 70s, 80s and early 90s will be complacent about a fall in sterling. but there is no doubt that an appreciable fall in the pound, such as we have seen, has been helpful both in supporting exports and import substitution in the short term and in encouraging the rebalancing of the economy that we need in the medium term. my second point is that it is important to distinguish the medium term from the short term goals. in the medium term we need to see a rebalancing of the economy in the uk, and some other countries, with a higher savings rates, less leverage in the financial sector, and higher net exports. however if everyone tries to increase saving and cut borrowing immediately we could prolong the downturn painfully. if everyone plans for the worst, we are more likely to get it. that is why economists sometimes sound a bit like st augustine who famously noted in his confessions “ make me chaste and continent, but not yet ”. this apparent tension between the medium term and the short term is evident in the banking sector. one lesson of the last 18 months has been that in the medium term banks need to work with lower leverage and higher buffers of capital and liquidity. i have argued elsewhere that we need in future to relate these buffers to the state of the economic and financial cycle so that they expand in good times and are sufficient to cover the inevitable losses in bad times. in a sense the purpose of the recapitalisation in october was to put banks capital up to the level it should have been had such counter cyclical measures been in place. but, at the moment we are in the downswing and we need to allow the banks to use those cushions and reduce their capital ratios from the new and higher starting point. the third point i want to make is about the breadth of the policy response. long experience has shown that interest rates are the most powerful and effective instrument for managing the economy. as a result other regulatory and fiscal measures have taken a back seat in macroeconomic management in the last 15 years. however the distinguishing feature of this recession is that it is centred on the banking system, which is at the heart of the allocation of resources through the economy and of the transmission mechanism for monetary policy. it is no surprise therefore that both in this country and elsewhere interest rates have been supplemented by measures that have directly focussed on banking and

of uncertainty, business and consumers tend to sit on their hands until the outlook is clearer. let me conclude. it remains the bank ’ s view that as the canadian economy continues to expand and to approach capacity, further timely and measured reductions in the amount of monetary stimulus will be necessary. let me remind you what i mean by “ timely and measured. ” “ timely ” relates to the fact that there is always a lag between our policy actions and their effect on the economy. “ measured ” relates to the judgments that we make at each fixed announcement date about the pace at which the economy is approaching full capacity, taking into account new information and data as they become available. our current view is that the fundamental underlying strength of the canadian economy has not changed since our july monetary policy report update. domestic demand may well be stronger ; at the same time, the external uncertainties bearing on the outlook appear to be greater than they were in early july. we will provide a detailed view of our outlook for the canadian economy in our next monetary policy report, on 23 october. * * * * * * * * * * * * * * * * * * * * this past year has certainly been full of challenges. over the last decade, canada has put in place the right macroeconomic policy framework to weather major shocks and take advantage of opportunities. we are confident that this framework will stand us in good stead in the future.