. in 2003 - 04, of course, we saw the reverse flow : investors became concerned about the large u. s. fiscal and current account deficits, foreign demand for u. s. financial assets declined, and the u. s. dollar, on balance, fell against many major currencies, including the canadian dollar. it can be very difficult to determine whether, at a given moment, type one or type two forces are driving the exchange rate. more often than not, shocks of different kinds occur at the same time, posing a challenge for the bank in terms of determining the implications for monetary policy. it's interesting to compare the exchange rate movements over the past few years, and their effects on canada, with those during the asian economic and financial crisis of 1997 - 98. because of that crisis, asian demand, which had accounted for a relatively large share of the growth of world demand for many commodities, weakened considerably. prices of key commodities produced by canada fell, and the growth of canadian aggregate demand was adversely affected. at the same time, and mainly because of the downturn in world commodity prices, the canadian dollar depreciated against the u. s. dollar. this depreciation, together with a strong u. s. economy, partly offset the negative effects of the asian crisis on canadian aggregate demand. the current situation, which in terms of commodities is the inverse of the one during the asian crisis, demonstrates the effectiveness and flexibility of the bank's monetary policy framework. while the particulars of today's situation are different, the monetary policy framework continues to support appropriate adjustments. adjusting to economic change in canada adjustment to economic change is never easy, either for businesses or individuals. over the past three years, changes in relative prices, including the appreciation of the canadian dollar, have contributed to a reallocation of labour and capital from the production of non - commodity tradable goods to the production of commodities. as i mentioned earlier, given the importance of commodities to our economy, and given the improvement in our terms of trade, there have been real economic benefits for canada as a whole. the flexibility and diversity of the canadian economy are also helping to facilitate adjustment to global economic developments. over the past three years, we have seen strong growth in capital spending in commodity - producing industries, as well as substantial gains in both capital spending and in employment in sectors with low exposure to international trade. capital spending has also increased, although at a more

in a number of respects is positive. let me conclude by pointing out that, even with last week ’ s increase in the policy rate to 1. 75 per cent, monetary policy remains stimulative. in fact, the policy rate today is still negative in real terms, that is, once you adjust for inflation. our estimate of neutral is in a range — currently 2 ½ to 3 ½ per cent. the policy rate will need to rise to neutral to achieve our inflation target. that said, the appropriate pace of increases will depend on our assessment at each fixed announcement date of how the outlook for inflation and related risks are evolving. in particular, we will continue to take into account how the economy is adjusting to higher interest rates, given the elevated level of household debt, and whether strong consumer confidence builds on solid job and income growth and leads to greater - than - expected consumption. we will also pay close attention to global trade policy developments and their implications for the inflation outlook. again, this risk is two - sided. with that, mr. chairman, senior deputy governor wilkins and i would be happy to answer questions. 2 / 2 bis central bankers'speeches