2002, before ending the year at about 63. 4 cents us. during this time, the cost of labour relative to capital goods declined in canada because most capital goods are imported and priced in u. s. dollars, while labour is paid in canadian dollars. businesses reacted appropriately to these price signals by increasing their production of services and of those manufactured goods that require relatively more labour and less machinery and equipment. what we have seen over the past couple of years is, in many ways, a mirror image of the 1997 - 2002 period. commodity prices have risen, and our terms of trade improved by more than 16 per cent from the fourth quarter of 2001 to the fourth quarter of 2004. the cost of labour has increased relative to the cost of capital goods. again, canadian firms are responding to the price signals. we are currently seeing large increases in investment spending in oil and gas extraction, other mining activity, and wood - product manufacturing. firms have been motivated both by high prices for their products and by the expectation that these high prices will persist. we are also seeing rising investment spending in sectors with low exposure to international trade, such as electric power generation, finance and insurance, and information and cultural industries. in these cases, firms are reacting to recent substantial gains in canadian domestic demand. for both of these groups, a crucial point to note is that a large part of the planned investment is motivated by the desire to increase production capacity. but the story is somewhat different for those sectors that are highly exposed to international trade, but where the prices of their products are not rising. here, i am referring to sectors such as auto parts, textiles, and clothing manufacturing. firms in these sectors are feeling the pressure of the higher canadian dollar, and are also facing increased competition from places such as china and india. the good news is that there is evidence that many of these firms are making adjustments in the face of adversity. investment spending for these firms is being channelled toward increasing productivity and reducing costs, not increasing capacity. because much of the productivity - enhancing machinery and equipment is produced abroad and priced in u. s. dollars, the appreciation of the canadian dollar has lowered the cost of this machinery and equipment relative to that of labour. other firms are using different strategies to adjust to the stronger canadian dollar and to increased competition from abroad. a growing number of firms are looking to cut costs by importing more inputs. others are phasing out production of goods and services with low profit margins and

the bank was able to anticipate all future movements in inflation, and adjust interest rates in advance to offset them and keep inflation exactly at 2 per cent. in such a case, it might appear to the casual observer that interest rates were being adjusted up or down for no reason. taking together the approaching closing of the output gap and our understanding of recent soft inflation readings, today ’ s increase in interest rates is clearly warranted. that being said, we will of course monitor the details of inflation carefully to determine the extent to which it remains appropriate to look through fluctuations in inflation. interest rates were lowered in 2015 in order to help the economy adjust to lower oil prices, and much of that adjustment is now behind us. while lower rates contributed to greater household financial vulnerabilities, enhanced macroprudential policies helped to mitigate these and will continue to do so. as the economy approaches full capacity, a higher policy rate in pursuit of our inflation target also serves to reinforce efforts to mitigate financial system vulnerabilities. governing council acknowledges that the economy may be more sensitive to higher interest rates than in the past, given the accumulation of household debt. we will need to gauge carefully the effects of higher interest rates on the economy. future adjustments to the target for the overnight rate will be guided by incoming data as they inform the bank ’ s inflation outlook, keeping in mind continued uncertainty and financial system vulnerabilities. with that, senior deputy governor wilkins and i will be happy to take your questions. 2 / 2 bis central bankers'speeches