just as much about inflation falling below target as we do about inflation rising above it. this symmetric approach helps keep the canadian economy near its production potential, thus encouraging strong, sustained growth in output and employment. i'm not arguing that all countries should copy every detail of our inflation - targeting regime. but it is important that central banks follow policies that anchor inflation expectations and thus prevent a buildup of deflationary as well inflationary pressures. as i mentioned before, both canada and the united kingdom operate with a flexible exchange rate. much has been said recently about floating exchange rates in relation to certain asian economies — china in particular — and global imbalances. the policies of some asian economies to encourage export - led growth, including the fixing of their exchange rates to the u. s. dollar, have caused a buildup of large foreign exchange reserves, thus exacerbating global imbalances. it's important to point out that, in theory, there is nothing wrong with countries having fixed exchange rates. but in practice, there is a major problem. through " sterilization, " certain asian countries — including china — have been trying to offset the domestic price effects of their foreign exchange intervention. this is inhibiting economic adjustment. at the bank of canada, we have argued that it is very much in china's own economic interest to float its currency. by having a flexible currency, china could gear its own monetary policy to its own domestic considerations. if the external value of the renminbi were allowed to rise, the global purchasing power of chinese citizens would also rise. this, in turn, would help to spread the gains from integrating into the world trading order throughout chinese society and would allow that country to boost its consumption, thus helping to resolve global imbalances. floating exchange rates are not the whole answer to the problem of global imbalances, but they are an important part of the solution. as i just said, when countries offset the effects of intervention, they delay domestic economic adjustment. they also delay global adjustment. just as worrying, such intervention is provoking threats in certain political quarters of protectionist measures. such wrong - headed measures could choke off the growth of international trade that has led to rising incomes worldwide. and so it is very important that all countries work to protect and enhance the free flow of goods and services by pushing the doha round of trade talks to a successful conclusion, and by strengthening the world trade organization to ensure proper compliance with the

be compounded by concerns that overall capital levels themselves will rise. this could lead banks to hoard any new capital rather than deploy it. doing so would worsen the economic outlook, which would then increase loan losses and further strain capital levels. for example, in canada, policy - makers have been encouraging greater use of the cls bank, which facilitates the settlement of foreign exchange in an environment without counterparty risk. the explicit g - 7 commitment to systemic institutions and the various guarantee programs should be used to help spread over time the necessary capital increases. moreover, policymakers should have the courage of their ( new - found ) macroprudential convictions. with g - 20 leaders calling for regulators to develop measures to mitigate procyclicality in capital, regulators should be careful about pushing capital standards up too high, too soon in the teeth of an economic slowdown. through - the - cycle capital means that ratios should fall in a downturn. finally, some policy - makers should give greater consideration to the central bank acting as market - maker of last resort to maximize the likelihood that core money markets remain open. notwithstanding the advantages of its financial sector, as one of the most open economies in the world, canada has been importantly affected by global events. the intensification of the global financial crisis has led in canada to an increase in credit spreads and a tightening in credit conditions generally. the global recession is deepening, with demand slowing sharply across all major regions in recent weeks. as a consequence, there have been further declines in the prices of many commodities and a deterioration in canada's terms of trade, which reduces canadian incomes. the nature of the u. s. slowdown, with its acute weakness in the housing and auto sectors, is also particularly problematic for our exporters. thus, while domestic demand in canada remains relatively healthy and the depreciation of the canadian dollar will offset some of the declines in external demand, the risks to growth and inflation in canada identified in the october monetary policy report appear to have shifted to the downside. despite having already cut official interest rates in half over the past year and having a financial sector that is still functioning effectively, some further monetary stimulus will likely be required to achieve the inflation target over the medium term. act locally, think globally this leads to the final lesson from canada's experience. as g - 20 leaders agreed this past weekend, effective regulation begins at home. to meet this responsibility, canada has a formal coordination