the purpose of setting out formal targets is to provide a clear indication of the downward path for inflation over the medium term so that firms and individuals can take this into account in their economic decision - making.... the inflation targets also provide information on the specific objectives to which the monetary policy actions of the bank will be directed in the period ahead and through the medium term. this information should make the bank ’ s actions more readily understandable not only to financial market participants but also to the general public and should provide a better basis than before for judging the performance of monetary policy. see bank of canada ( 1991 ). bank of canada ( 1991 ), pp. 10 - 11 credibility, inflation, and inflation expectations after inflation fell to 2 per cent, the expectations of forecasters and businesses soon began to fall in line with the targets. at first this was for expectations at the 2 - year horizon. this then lengthened to the 6 - to 10 - year horizon. finally, long - term expectations of inflation in financial markets, as expressed by the difference between 30 - year yields on conventional and index - linked bonds, fell in line with the 2 per cent target midpoint in 1997. what was particularly noticeable after just a couple of years of targeting was that expectations over a 2 - year horizon or longer tended to be affected very little by what was happening to current inflation rates, whether for the total cpi or for a measure of core inflation. this was in marked contrast to earlier periods in canadian history, in which expectations for the future had been fairly tightly linked to recently observed inflation rates. with the low inflation target becoming increasingly credible, the whole nature of the inflation process seemed to change. the short - run response of inflation to measures of excess demand and supply appears to have fallen during this period. and the response of inflation to relative price shocks, such as changes in the exchange rate and energy prices, also seems to have declined. these changes have had the effect of reinforcing the stability of the inflation process and, therefore, of inflation itself. overall, it became increasingly evident through the last decade that the inflation target deals with expectational problems. among close observers of the economy, as well as businesses and those bargaining over wages, it promotes a much greater degree of confidence and understanding than monetary targets or a vaguely expressed desire for price stability ever did. people care about inflation. therefore, when the focus of policy is on inflation itself and when accountability is in terms of a specific measure of

investment in canada. this leaves the level of economic activity lower than the bank had been expecting. • while household spending remains solid, and various indicators in the housing sector continue to rise, slower growth of household credit and higher mortgage interest rates point to a gradual unwinding of household imbalances. • the bank expects that a better balance between domestic and foreign demand will be achieved over time and that growth will become more self - sustaining. but this will take longer than previously projected. • we are expecting investment growth to contribute to a rebound in the rate of labour productivity growth over the next couple of years. however, demographic factors, bis central bankers ’ speeches primarily the aging population, are expected to put a drag on the growth rate of trend labour input. this drag will largely offset the effects of rising investment. this is why we expect that the growth rate of potential output will remain fairly stable at around 2 per cent over the next three years. • real gdp growth is projected to increase from 1. 6 per cent this year to 2. 3 per cent next year and 2. 6 per cent in 2015. the bank expects that the economy will return gradually to full production capacity, around the end of 2015. • inflation in canada has remained low in recent months. this reflects the significant slack in the economy, heightened competition in the retail sector, and some other sector - specific factors. • with larger and more persistent excess supply in the economy, both total cpi and core inflation are expected to return more gradually to 2 per cent, around the end of 2015. • although the bank considers the risks around its projected inflation path to be balanced, the fact that inflation has been persistently below target means that downside risks to inflation assume increasing importance. however, the bank must also take into consideration the risk of exacerbating already - elevated household imbalances. • weighing these factors, the bank judges that the substantial monetary policy stimulus currently in place remains appropriate and last week decided to maintain the target for the overnight rate at 1 per cent. with that, tiff and i would be pleased to take your questions. bis central bankers ’ speeches