12 months. while commodities are less important to us than they used to be, they still make up about 30 to 35 per cent of our merchandise exports. although canadians have to deal with these difficulties coming from abroad, it is important to remember that, overall, our economy is still in good shape. this is, first and foremost, because some basic aspects of our economic situation have improved markedly in the last few years. we now have a low rate of inflation, a fiscal surplus, and a declining ( though still high ) public debt - to - gdp ratio. as well, canadian businesses have undertaken major restructuring and investment initiatives to increase their productivity. because of these fundamental strengths, we are now better positioned to weather sudden shocks. as for the near - term outlook, there are also a number of positive elements in the picture. economic activity in the united states, our main customer, remains high. and here in canada, the latest indicators suggest continued expansion in consumer spending and business investment, supported by higher employment and low medium - and long - term interest rates. this year, the canadian economy will not repeat the 4 per cent growth experienced through 1997. but it may still expand by 2½ to 3 per cent ( fourth quarter over fourth quarter ). clearly, a good deal of uncertainty surrounds any estimate at this juncture, given the international situation. for one thing, it is difficult to judge how quickly and effectively japan will deal with its problems, and what this will mean for the rest of asia. the extent of the impact from the recent spreading of the crisis to russia and the pressures in parts of latin america is also uncertain. but, at the same time, most forecasters have consistently underestimated the resilience of the us economy, and may still be doing so. implications for the canadian dollar one of the most talked - about economic events in canada over the past year has been the decline in the external value of our currency. at its lowest point, in late august 1998, the canadian dollar had depreciated by about 13 per cent against the us dollar and by more than 7 per cent against the german mark from its average value in the first half of 1997, before the asian crisis erupted. since that low point in late august, the canadian dollar has recovered somewhat against the us dollar. what has caused these movements? exchange rates will typically reflect developments in canada and abroad. thus, it is important to keep in mind that the recent movements in the canadian dollar are

monetary and financial conditions. the same analysis indicating that qe had stimulative effects on canada should also work in reverse : unwinding unconventional policies will tend to push up market interest rates in canada and dampen the u. s. expansion. this effect would only be partly offset by the downward pressure the exit would put on the value of the canadian dollar. in the event that the fed ’ s renormalization does not play out smoothly in financial markets, the impact on canada could be significant. so how will all of this influence what the bank of canada would do? you can probably already anticipate my answer : “ it depends. ” the bank of canada ’ s goal is to achieve our 2 per cent target for inflation in a sustainable way, which requires that our economy run close to its full potential. we will need to assess the various countervailing effects in the context of canadian economic and financial conditions more generally. like the fed, we will balance the risks of acting too soon and stifling burgeoning economic growth against the risks of acting too late and letting inflation overshoot and fuelling imbalances in our housing markets. but that balance of risks is likely to be different here than in the united states. thus, while monetary policy in the united states has an important impact in canada, i want to stress that canadian monetary policy is independent and can diverge from the fed ’ s policies. in fact, our policy rate is already higher than the fed ’ s as a result of the moves we made four years ago in response to the improving economic conditions at that time. looking forward, as always, our rate decisions will depend on the state of the canadian economy. preserving the value of money by keeping inflation low, stable and predictable is our mandate. are we there yet? let me conclude. the financial crisis of 2008 – 09 reminded us how tightly linked the u. s. and canadian economies are – for better or for worse. and the economic recovery has shown us that healing after a financial crisis is slow and often painful. the steps taken by the u. s. federal reserve, the central bank closest to the epicentre of the crisis, prevented the crisis and subsequent recession from being much worse. and they continue to support the u. s. and global economies through that long healing process. the fed ’ s unconventional monetary policies affected canada through various channels, notably by pushing down market interest rates worldwide. by the same token, as fed