david dodge : review of canada ’ s recent economic performance and prospects remarks by mr david dodge, governor of the bank of canada, at a luncheon at the canadian consul general's residence chicago, illinois, 9 may 2002. * * * thank you for the invitation to this luncheon and for the opportunity to speak to you this afternoon. i want to take this time to review canada's recent economic performance and prospects and to hear your views as to how you see things evolving in the u. s. economy. canada's recent economic performance in canada, the economic weakness that we experienced was really concentrated in the third quarter of last year, particularly in september. the terrorist attacks in september created a great deal of uncertainty, and so the bank of canada, like the u. s. federal reserve, provided an extraordinary amount of stimulus by aggressively lowering interest rates. but with the improvement in the geopolitical situation, consumer confidence recovered rapidly, and consumers responded strongly and quickly to the monetary stimulus. interest - sensitive sectors, such as housing and automobiles, showed remarkable strength. as a result, we saw annualized growth of 2 per cent in the fourth quarter of last year, when many analysts were expecting the canadian economy to continue to shrink. canada's economic outlook in the monetary policy report, which we published a couple of weeks ago, we forecast growth in the first half of this year of between 3 1 / 2 and 4 1 / 2 per cent at annual rates, although data released since then suggest that the first quarter may have been slightly stronger than we had thought. second - half growth is expected to be in a range of 3 to 4 per cent. with growth at the end of last year and early this year being stronger than we had earlier assumed, the economy is operating at a higher level than anticipated. indeed, this strength led us to sharply raise our forecast for average annual growth this year. in the monetary policy report update published in january, we pegged average annual growth for 2002 at just over 1 per cent. when we published our full report in april, we raised that forecast to between 2 1 / 4 and 3 1 / 4 per cent. with the economy now operating at a considerably higher level, the gap between the actual level of economic activity and the level of potential output is smaller than we had predicted, and is currently narrowing. we now expect that the output gap will close in the second half of 2003. in these circumstances, our job will be to

’ s monetary policy implementation system : does the evolving environment support maintaining a floor system? ” bank of canada staff discussion paper ( forthcoming ). 8 see d. lopez - salido and a. vissing - jorgenson, “ reserve demand and quantitative tightening, ” federal reserve board ( november 2022 ). 9 this is to say that, in ordinary times, we routinely buy assets to offset the ongoing growth of currency in circulation. more specifically, once we are at the steady - state level, we will start buying goc bonds and treasury bills again. we will also resume our regular term repo operations. - 8category / categorie : protected b / protege b quantitative tightening is happening, but it will take time to run its course. conclusion it ’ s time for me to wrap up. the covid - 19 pandemic was certainly unprecedented, and it merited a strong response from the bank. let me re - emphasize that this level and type of intervention should not be expected with every episode of market turbulence in the future. we will do some things differently next time if the need arises. this includes putting in place measures to further mitigate moral hazard. after the global financial crisis, we learned a lot by carefully reviewing the effectiveness of our response. that work helped inform our response to the pandemic, just as the work we are doing now will help us respond better to future crises. and it ’ s important that we remain nimble in response to the uncertain times we ’ re in. in the past month alone we ’ ve seen important developments — headline inflation has dropped, and the risk appetite in global markets has pulled back, partly reflecting the increased stress in global banking that i noted at the beginning of my speech. at the same time, the labour market in canada remains tight and this is putting upward pressure on many services prices. we continue to expect consumer price index ( cpi ) inflation to come down in the months ahead, but we will need to see further slowing in core inflation to get cpi inflation back to the 2 % target. we are also keeping a close eye on stresses to global banking systems as we turn our attention to the april monetary policy report. we will consider the macroeconomic impact of this evolving situation as we put together our next projection. we ’ ll be looking specifically at potential spillovers into the real economy to the extent that financial conditions tighten and there are broader confidence effects. to conclude, we will continue learning from our actions