david dodge : recent economic developments and the conduct of monetary policy speech by mr david dodge, governor of the bank of canada, to the metropolitan halifax chamber of commerce, halifax, 18 june 2003. * * * good afternoon, and thank you for the invitation to speak with you today. it ’ s great to be back in halifax, one of canada ’ s most colourful port cities. it is the wonderful juxtaposition of the new with the old - halifax ’ s modern focus with its rich maritime traditions - that makes this city special. it ’ s been a year since i last spoke in halifax, and a lot has changed since then. we ’ ve witnessed some extraordinary events, both in canada and around the world. on the whole, canada ’ s economy has withstood the turmoil quite well. the impact of some more recent events is not yet clear. still, i will try today to outline how our economy has evolved over the past year and to lay out the issues that we ’ ll be assessing as we prepare our july monetary policy report update. watching conditions and demand pressures as we at the bank of canada set monetary policy, we watch all the events affecting our economy, including global geopolitical, economic, and financial conditions. we do this with a view to keeping domestic inflation near the 2 per cent midpoint of canada ’ s inflation target range of 1 to 3 per cent. as we have often said, delivering an environment of low, stable, and predictable inflation is the best contribution that monetary policy can make to a strong, sustainable economy and rising living standards for canadians. such a low - inflation environment also helps keep our economy near its production potential over time. to achieve those goals, we keep a close eye on the factors influencing demand and production capacity - factors that will, in turn, influence inflation over the medium term. and we adjust monetary policy to keep the future trend of inflation near the 2 per cent target midpoint. where we ’ ve been as i ’ ve said, it ’ s been a year since i last spoke in halifax. but to place our recent experience in some context, i should go back a bit further than that - to the 11 september 2001 terrorist attacks in the united states. in the wake of that terrible event, the bank of canada quickly and aggressively cut its policy interest rate to shore up confidence and support domestic demand. this action, together with earlier reductions in our policy interest rate, meant that the bank had injected considerable stimulus into

currency. nor can we be sure that there is enough monetary stimulus in the economy to support the increases in household spending and business investment that would be required to return the economy to full capacity by early 2005. some important economic data are expected between now and our next fixed announcement date, on 20 january. these should give us a better sense of how canada ’ s export sector is doing, and how household spending went over the holiday season. we will be closely watching all the data ahead for evidence that the economy is growing at a rate solidly above the growth of potential. conclusion this past year, like the two years before it, was full of “ interesting ” economic challenges for canada and the world. it is tempting to hope that next year will be somewhat less “ interesting ” and bring fewer challenges. but regardless of what next year brings, what is critical is that we keep our eyes on the longer - term horizon and focus on the challenges ahead. these challenges include adapting to shifting demographics, raising productivity, and getting our microeconomic policy framework right. at the bank of canada, we remain committed to the sound monetary policy framework that will help us rise to tomorrow ’ s challenges. and that ’ s good news for all of us, no matter what the coming years may bring.