core rate in the first half of 2004, before steadying out at a rate close to core inflation. in view of the domestic inflation situation and the underlying momentum of domestic demand, we have raised our target overnight rate by 25 basis points on each of our last two policy announcement dates — in march and in mid - april — bringing it to 3. 25 per cent. as i said before, economic, financial, and geopolitical uncertainty figured prominently in the global picture last october. some of the geopolitical and financial uncertainty has lifted in recent months, and the bank expects that it will continue to recede. however, weak domestic demand in some regions of the world is still a concern. so, over the near term, a degree of global economic uncertainty remains. even with all this, the risks confronting the world economy now appear to be better balanced than they were last autumn. and, by year - end, we expect that business and household confidence levels should improve. in canada, domestic demand has remained quite strong. there is uncertainty, however, about the possible economic impact of severe acute respiratory syndrome ( sars ), particularly in the greater toronto area. as i said last week, we expect that economic growth in the second quarter will be somewhat weaker than we projected in the monetary policy report because of the impact of sars. but it is too soon to make an assessment of the magnitude of its effect on economic activity. we continue to monitor the situation very closely. we expect that the canadian economy will strengthen towards the end of 2003, partly thanks to a pickup in economic activity in the united states. average annual growth in canada is expected to be about 2 1 / 2 per cent this year. during 2004, our economy should strengthen further, expanding at a rate above its 3 per cent growth of potential. this means that most of the small amount of economic slack that is likely to open up in canada during 2003 will have closed by the end of next year. for this reason, the bank continues to believe that further reductions in monetary stimulus will be necessary over time to return inflation to its 2 per cent target and to sustain output levels close to capacity. the timing and pace of further increases in policy interest rates will depend on the strength of domestic demand, the evolution of inflation expectations, and the pace of economic expansion in the united states and in overseas economies.

than other g - 7 countries, our economic growth has been disappointing in the past year. i think we can agree that the finish line is proving elusive ; we “ are not there yet. ” looking ahead, the bank sees the economy gaining momentum through next year and 2015, but there are uncertainty and risks around the outlook. over time, one can expect the economy to operate at its full capacity, with no output gap and with inflation steady at its target rate. at that point, the growth rate of potential determines the pace of economic activity. it is worth noting that reaching potential growth does not necessarily imply that the economy has returned to its natural or self - sustaining growth rate. depending on the circumstances, monetary policy may still need to provide stimulus or restraint. bis central bankers ’ speeches if my speech today achieves its potential, you will gain a deeper understanding of potential output in canada, why it is hard to measure, why it has slowed, where we are today, and what the future may hold for our economy. deconstructing the immeasurable measuring potential output and the output gap is difficult because potential is not directly observable. it is hard to measure what could be. what we try to do is determine the level of output that can be achieved with available resources ( labour, capital and materials ) without creating inflationary pressures. potential output as a concept, and its link to inflation, make a lot of sense. time is the most precious quantity, and as you know too well, balancing our professional and personal lives is no easy task. and as the former encroaches on the latter, history tells us that wage pressures begin to build, eventually leading to higher prices. similarly, when a firm ’ s production can ’ t keep pace with demand, prices move up in an attempt to restore balance. but while conceptually appealing, accurately measuring potential output is a formidable task. to do so, we must take a view not only on how many hours people are willing to work at a given wage, but also on how productive these people will be when their labour is combined with other inputs, such as machinery and equipment or on - the - job training. at the aggregate level, the future trajectory of potential output will depend on a lot of variables : on how strong the demand is for our goods and services, on how much existing firms decide to invest in research and development and technology, on how many new firms are created, and other unknowns. 2 it