targeting 2 per cent total cpi inflation, in recognition of the benefits of a slightly positive inflation rate in facilitating economic adjustments, and of the potential operational challenges associated with a lower target rate. 1 the lower the inflation target, the more likely it is that some nominal wages will occasionally need to decline to facilitate economic adjustment. if workers are reluctant to accept these declines, the process of real bis central bankers ’ speeches targeting an inflation rate lower than 2 per cent is intuitively appealing, since achieving the target still causes the price level to double roughly every 35 years, which may contribute to money illusion and more generally complicate inter - temporal decision - making. a lower inflation target could also further reduce the costly distortions associated with inflation, such as those stemming from difficulties in distinguishing between absolute and relative price changes, the cost of infrequent price and wage adjustments, and the disincentives to hold money. the bank ’ s research has generally found that the further benefits from reducing these distortions imply an optimal rate of inflation closer to, or even slightly below, zero. in a perfect world, we would pursue those gains through a lower inflation target. but we do not live in a perfect world. even the models that we employ to quantify the additional benefits of a lower inflation target – models that aspire to an economist ’ s utopia – disagree on how material those benefits would be. moreover, these models have typically abstracted from the very real - world costs and risks associated with very low rates of inflation, the most important of which is the risk associated with the zero lower bound ( zlb ) on interest rates. at this level, conventional monetary policy can no longer be used to stimulate the economy – a risk that was brought into stark relief during the recent crisis. the lower the inflation target, the lower the “ equilibrium ” nominal policy interest rate will be, and thus the greater the likelihood that shocks will push interest rates to the zlb during “ normal ” times. research at the bank and elsewhere suggests that encounters with the zlb should be quite rare with a 2 per cent inflation target, but may be more than four times more likely with a 1 per cent target and at least 16 times more likely with a zero per cent target. indeed, with a target below 2 per cent, it is likely that the zlb will be encountered through the ordinary course of the business cycle. the costs of hitting the zlb depend on the effectiveness, reliability and costs of available unconventional policy

inflation to target over a horizon of six to eight quarters. however, over the past twenty years, there has been considerable variation in the horizon, in response to varying circumstances and economic shocks. this flexibility is required because, when taking monetary policy actions to stabilize inflation at target, the bank must also manage the volatility that these actions may induce in the economy. these trade - offs will differ depending on the nature and persistence of the shocks buffeting the economy. there are limits to this flexibility. the bank ’ s scope to exercise it is founded on the credibility built up through its demonstrated success in achieving the inflation target. this reinforces the importance of continuing the bank ’ s relentless focus on achieving the 2 per cent inflation target over time. conclusion let me conclude with a quick illustration of how we are applying the framework under current circumstances. as recently as july, markets were expecting the near - term withdrawal of monetary policy stimulus in canada. at that point, the policy interest rate had remained near historic lows for the better part of a year, even after canada had recovered both all of the jobs and all of the output lost during the recession. this degree of stimulus was in part bis central bankers ’ speeches necessitated by the considerable external headwinds facing the canadian economy, including weak u. s. activity and the persistent strength of the canadian dollar. since then, the canadian economy has been hit by major shocks. the global economic outlook has weakened considerably and financial market volatility has increased, owing in particular to the ongoing european sovereign debt crisis. european authorities have announced important plans to provide time to refound their monetary union, but acute strains persist. at this point, the crisis appears barely contained. in canada, total cpi inflation is near the top of the target range, and preliminary evidence suggests that economic growth in the second half of the year will be slightly stronger than the bank had projected in the october monetary policy report. however, as outlined in the october report, a weaker external outlook is expected to dampen growth in canada through financial, confidence and trade channels. domestic demand is expected to remain the primary driver of growth in canada, but these shocks from abroad imply more subdued growth in household expenditures and less vigorous growth in business investment. as a result, the bank continues to expect excess supply in the economy to persist well into 2013. this, along with the reversal of earlier sharp increases in food and energy prices, is expected to push total cpi inflation toward the bottom of the target range