itself, by way of background. as i mentioned earlier, at a conceptual level everything seems relatively simple. monetary policy in canada has one objective – achieving and maintaining a low, stable and predictable level of inflation. this objective was formalized in 1991 in an inflation - control agreement between the federal government and the bank. it identifies a specific target for the rate of this presentation updates and extends t. macklem, “ information and analysis for monetary policy : coming to a decision, ” bank of canada review ( summer 2002 ) : 11 – 18. bis central bankers ’ speeches inflation – the midpoint of an inflation - control range – as well as the price index that is to be used to measure inflation. since 1995, the target level for the inflation rate has been 2 per cent ( within a control range of 1 to 3 per cent ), as measured by the 12 - month rate of change of the total consumer price index ( cpi ). this may seem like a rather narrow objective – a topic that we will return to later in the presentation – but experience has shown that this is the best contribution that the bank can make to the economic well - being of canadians. the greater certainty that it provides with regard to the future path of prices allows households and businesses to make more informed spending and investment decisions, and minimizes the inequity associated with unexpected movements in prices. keeping inflation low, stable and predictable is a means to an end, not an end in itself. under normal circumstances, this single objective is pursued using a single policy instrument or tool – changes to the overnight rate of interest. 2 the overnight rate is set by the bank of canada and determines the rates at which banks and other selected agents are able to borrow and lend at the shortest end of the yield curve. but the story does not end there. movements in the overnight rate set in train a number of other changes throughout the economy that ultimately affect the rate of inflation. the transmission mechanism this monetary policy transmission mechanism can be described as follows ( figure 1 ). changes in the overnight interest rate influence the interest rates that the market sets on securities further out the yield curve and with different risk and liquidity characteristics ( for example, mortgage rates ). they also influence the exchange rate – the external value of the canadian dollar. movements in these asset prices, in turn, affect aggregate demand in the canadian economy by influencing the spending and investment decisions of both canadians and foreigners. if strong aggregate demand pressures appeared likely to push output above

1991, the low and stable inflation environment has allowed consumers and businesses to manage their finances with greater certainty about the future purchasing power of their savings and income. interest rates have also been lower in both nominal and real terms across a range of maturities. more broadly, low, stable and predictable inflation has helped to encourage more stable economic growth in canada as well as lower and less - variable unemployment. 2. if the canadian economy is operating close to capacity ( i. e., near full employment ) and inflation is close to or at the 2 per cent target, interest rates have to be close to their “ normal ” or “ neutral ” levels. not true. if there were no forces acting on the economy to push it away from this desired state, the statement would be true. however, this is seldom the case. headwinds and tailwinds are often present, threatening to push economic activity and inflation higher or lower. monetary policy needs to lean against these forces with opposing pressure from higher or lower interest rates in order to stabilize the economy and to keep inflation on target. monetary policy is seldom static ; it has to respond as these forces ease or escalate. 3. focusing on price stability limits the bank ’ s ability to pursue its other major objective, financial stability. not true. while at times there may appear to be tensions between these objectives, the two are in fact inextricably linked ; it is impossible to achieve one of them without maintaining the other. although other policy levers, such as bank regulation and macroprudential tools, are typically the first lines of defence in ensuring financial stability, monetary policy can, in exceptional circumstances, play a complementary role in achieving this end. fortunately, there is enough flexibility in the present monetary policy framework to do so while achieving our inflation target over the medium term. one is not sacrificed for the benefit of the other. some concluding thoughts canada ’ s monetary policy framework and the process that the bank uses to make its decisions have evolved over time. the move to inflation targeting in 1991 and the move to fixed announcement dates are certainly the most noteworthy, but there have been many other refinements in the way policy is formulated and implemented. the process for decision - making that i have described is intensive and collaborative. it has also proved to be very effective. without doubt, there will be further refinements in the future as we learn from new experiences. the effort to improve the decision - making process is ongoing. thank