. for over a decade, following a joint agreement with the federal government, the bank has operated with a system of inflation targets. we aim to keep the trend of consumer price inflation at the 2 per cent midpoint of a 1 to 3 per cent range. because we have managed to keep inflation inside the target range through most of the past decade, canadians'expectations for inflation have become firmly anchored around the 2 per cent target. right off the top, let me assure you that the bank of canada will continue to pursue a monetary policy focused on returning inflation to that 2 per cent target, should it deviate in either direction. canada's inflation - targeting framework operates symmetrically ; that is, we minimize the chances of both a sustained upward drift in inflation and the threat of deflation. recently, rates of inflation in canada have come in higher than expected. at the same time, a weak global economic environment, the huge drop in equity prices, and declines in the prices of some manufactured goods are raising fears of deflation in other countries. let's look at both these risks. the upside risk : inflation first, let's consider the upside risk of accelerating inflation. it has been more than a decade since canada has experienced prolonged high inflation. since the targeting system was put in place, both the trend of inflation and inflation expectations have come down to near 2 per cent and stayed there. in recent months, cpi inflation has risen substantially, for several reasons. we've seen higher oil and gas prices, higher home and auto insurance premiums, higher tobacco taxes, and, in ontario, higher electricity prices. there has also been the " echo effect " of temporary price discounting in late 2001, following the 11 september terrorist attacks. at the same time, stronger demand in canada has been pushing up prices in some sectors, such as housing and some services. these pressures are starting to show up somewhat more broadly in the cpi data ; and, without offsetting declines in other components of the cpi, these pressures are having an impact on all our measures of trend inflation. this suggests to us that demand conditions may be strong enough now to make it easier to raise prices and widen profit margins. the bank's policy aims to maintain total cpi inflation at 2 per cent, or to return it to that point within 18 to 24 months. with that horizon in mind, we need to look through any short - term volatility — and there's been a lot of short -

t know how the situation in the middle east will be resolved. so, we have made an assumption that the related uncertainties will dissipate in the second half of 2003. our projections for the global and canadian economies are based on this assumption. so, let me now turn to the canadian outlook. after growing significantly faster than potential during the first half of 2002, canada's economy slowed to a growth rate close to potential in the second half of the year. even with this slowdown, the level of demand has remained near capacity since the middle of last year. as we look forward, we foresee below - potential growth in the first half of the year. but we anticipate increased demand pressures in the second half of 2003 and into 2004, as global uncertainties diminish. however, with an appropriate reduction in the amount of monetary stimulus, we see the level of output remaining close to capacity during 2003 and into 2004. as i said earlier, recent inflation rates have come in somewhat higher than expected. this reflects certain one - off price increases, such as higher insurance premiums, but also some broadening of price pressures as a result of stronger demand. the one - off factors will hold the core rate of inflation well above the 2 per cent target in the first half of this year. in the second half and into 2004, we expect the core rate to ease, as the effect of the one - off factors diminishes and the removal of monetary stimulus keeps demand pressures in check. the outlook for total cpi inflation this year will continue to be importantly affected by developments in crude oil prices. with oil and gas prices where they are now, we could see cpi inflation rates between 4 and 4. 5 per cent in the first quarter. if oil and gas prices decline in the second half, as futures prices suggest they will, then total cpi inflation would move back down in line with core inflation. let's remember that the stance of monetary policy remains stimulative. to return inflation to the 2 per cent target over the medium term, we will need to remove some of the stimulus. in other words, we will need to raise interest rates. a number of elements will come into play in determining the pace at which we will reduce monetary stimulus. let me reiterate them. first, although much of the recent run - up in inflation was the result of special factors, we can't rule out the possibility that demand pressures are becoming more prominent