us away from our 2 per cent target - whether above or below. when strong demand pushes the economy against the limits of its capacity and threatens to raise future inflation above the target, the bank will raise interest rates to cool off the economy and mitigate those inflation pressures. when demand is weak, as we saw in 2001, future inflation is likely to ease. so the bank will lower interest rates to stimulate the economy, and absorb economic slack, consistent with keeping inflation on target. the significant easing of monetary policy during 2001 was a key factor behind the strong growth of household demand in the first half of this year. let me now turn to the outlook. in our april monetary policy report, we said that the recovery in the canadian economy began sooner, and was considerably stronger, than anticipated. consumer spending and residential construction were reflecting the stimulus from both monetary and fiscal policy. canada ’ s export volumes had begun to grow once again, as the u. s. economy began to recover. by the time of our monetary policy report update in july, we were also seeing a rebuilding of inventories and an increase in spending on machinery and equipment. these were suggesting a broadening of the recovery across economic sectors. the july update still reflects our view of the economy. as we said two weeks ago, domestic demand in canada remains stronger than expected, bolstered by the substantial amount of monetary stimulus still in the economy. canada ’ s record of job creation has been nothing short of remarkable, with almost 400, 000 new jobs since the beginning of the year. this strong job growth is reinforcing the confidence of canadian consumers. in addition, medium and small businesses continue to invest. all this paves the way for higher output and ongoing strong domestic demand. but at the same time, there are downside risks and uncertainties, mostly originating from outside canada. near - term prospects for growth in the united states and the major overseas economies appear to have weakened. private and public sector economists have revised down their near - term growth forecasts for the united states, europe, and japan. this could imply that canada ’ s exports, which were already slightly weaker than anticipated in the second quarter, could continue to be affected by slower growth in global demand. the geopolitical situation remains quite unsettled. finally, in the united states and canada, we are still working through the corporate governance issues that have contributed to this year ’ s financial market volatility. history has taught us that during periods

able to weather major shocks such as the asian crisis, or last year ’ s global slowdown. indeed, over the period from 1997 to 2001, canada averaged annual economic growth of about 4 per cent, while the u. s. average was about 3. 5 per cent. and while the u. s. economy fell into recession last year, ours did not. although the productivity growth of canadian companies has not been as strong as that of firms in the united states, we have seen encouraging signs that investments in technology and training are leading to greater productivity gains here. indeed, business sector labour productivity in canada grew at an annualized rate of 2. 0 per cent from 1997 to 2001, much higher than the 1. 2 per cent average over the 1990 - 96 period, and only a bit below the revised 2. 3 per cent rate of productivity growth recorded in the united states. as we look forward, we see positive signs for future productivity growth in canada, thanks to the efforts of canadian firms to adjust to new technologies and incorporate them into their business processes. the shocks of 2000 - 2001 indeed, the economy has held up remarkably well when you consider that we have been hit with four major shocks during the past couple of years. first, there was the meltdown in the technology and telecommunications industries, which began in late 2000 and the effects of which are still being felt today. the second was the broader economic slowdown in 2001 that affected, to various degrees, the economies of most countries. third, and overshadowing every other event last year, was the 11 september terrorist attacks. with the first anniversary just passed, this seems like an appropriate time to reflect on the extraordinary events that have buffeted the north american economies since that terrible day, and to review how the bank of canada responded to those events. our most immediate responsibility was to keep canada ’ s financial system functioning. our next responsibility was to promote consumer and investor confidence. therefore, the bank of canada took extraordinary monetary policy action. on 17 september last year, we reduced our key policy interest rate outside our scheduled announcement dates. between september 2001 and january 2002, we lowered interest rates by a total of 200 basis points to help mitigate the impact of 11 september on an already - weakening economy. it turned out that consumer confidence in canada was not as badly shaken as had been feared. as the immediate geopolitical and economic uncertainties diminished, consumers responded strongly and quickly to the monetary stimulus. interest rate - sensitive sectors