exist and isn ’ t likely to. i don ’ t mean to downplay the importance of research and the development of stylized models, which are crucial in helping us understand aspects of the relationship between the real economy and financial stability. but the reality is that central banks have to cope with tremendous uncertainty regarding financial stability issues, and this is layered on top of the regular uncertainties of monetary policy concerning unobservable variables such as potential output. given all of the uncertainty, it seems to me the proper response of the monetary authority is to acknowledge and accept all the things we don ’ t know, gauge the risks facing the economy as best we can, and manage those risks as we conduct monetary policy. i ’ ll describe our riskmanagement framework in detail later on. but we still have the question of how policy - makers should respond to financial imbalances, particularly those that are concentrated in a specific sector or asset class. the bank of canada ’ s view is that monetary policy should be the last line of defence against threats to financial stability, behind the joint responsibility of borrowers and lenders, appropriate regulatory oversight within the financial sector, and sound macroprudential policies. let me say a little bit about each of these. financial stability threats – lines of defence borrowers and lenders are the first line of defence. they bear the ultimate responsibility for their own decisions at the individual and firm level. it is not the role of monetary policy to protect individuals from making bad choices. it is possible that the sum of those bad decisions could threaten financial stability or the economy as a whole, and so we monitor the situation as a matter of course. but there is no reason to assume that, in all circumstances, equilibrium will devolve into turmoil as borrowers and lenders inevitably sow the seeds of a financial crisis. indeed, market discipline enhanced by appropriate transparency can be very helpful in this regard. that ’ s not to say policy - makers have no role in enhancing this line of defence. financial education and efforts to improve financial literacy can help consumers better understand the important decisions they make. in canada, we have seen increasing levels of household debt that represent a key vulnerability for the financial system. the main driver behind this rise has been an increase in home - backed debt against a backdrop of rising house prices, particularly in two of canada ’ s largest cities – toronto and vancouver. among other factors, this was due to low interest rates that resulted in the ratio of debt service

david dodge : summary of the latest monetary policy report opening statement by mr david dodge, governor of the bank of canada, at a press conference following the release of the monetary policy report, ottawa, 21 october 2004. * * * today, we released our october monetary policy report. the report reviews economic and financial trends in the context of canada ’ s inflation - control strategy. the canadian economy has grown faster than was projected in last april ’ s monetary policy report and the july update, largely because of a surge in exports. it is now operating near its production capacity and continues to adjust to global economic developments. the bank ’ s base - case projection for the period to the end of 2006 calls for aggregate demand for canadian goods and services to expand, on average, at about the same rate as potential output. given the effects of higher oil prices and the past appreciation of the canadian dollar, the bank projects economic growth to be slightly less than 3 per cent in 2005, and slightly more than 3 per cent in 2006. with the economy expected to remain near its production capacity throughout this period, core inflation is projected to move back up to the 2 per cent target by the end of 2005. given the path suggested by futures prices for crude oil, the bank expects total cpi inflation will rise to the top of the 1 to 3 per cent target range in the first half of 2005, before falling slightly below core inflation in early 2006. against this background, the bank raised its target for the overnight rate to 2. 5 per cent on 19 october. the base - case projection assumes further reduction of monetary stimulus over time, to keep the economy near its production potential and to achieve the inflation target. the pace of interest rate increases will depend on the bank ’ s continuing assessment of the prospects for factors that affect pressures on capacity and, hence, inflation. there are significant risks and uncertainties around this base - case projection, related to the adjustment to changes in the global economy, including changes in commodity prices and exchange rates. the risks surrounding global economic prospects relate primarily to the evolution of oil prices, the pace of expansion in china, the way in which current account imbalances in the united states and east asia will be resolved, and geopolitical developments.