however, they reject full real interest rate convergence for greece, spain and italy as well as the uk. see angeloni and ehrmann ( 2002 ) and ortega ( 2003 ) among the academic contributions ; see also ecb ( 2003, 2005 ) especially on the policy implications. 3. 2 ireland v portugal in the remainder of my speech, let me focus on two extremely different performances within the euro area : ireland and portugal. real gdp per capita in ireland was 89 % of the euro area average in 1995, but was already above the average in 1998. between 1998 and 2006, real income per capita increased by almost 25 percentage points, to reach 131 % of the euro area average in 2006, which is the second highest after luxembourg. ( based on these numbers, it is surprising how many people still speak of ireland as a catching - up economy ). as for portugal, its income per capita was 65 % of the euro area average in 1995, a figure which has changed little in over a decade ( it was 67 % in 1998 and 68 % in 2006 ). the bottom line is that real per capita income in the two countries was not very different in the early 1990s but became twice as large in ireland by 2006. how could that happen? the answer to this question may well matter since ireland and portugal in 1995 were in a situation not unlike that of some new member states now ( though, as we have seen, for some of them the starting point is significantly lower ). 19 one approach to understanding the difference can be found in growth accounting exercises. the stellar growth performance of ireland was not just due to higher labour and capital input but also, and mainly, due to labour productivity growth, which has been close to 3 % per year since the introduction of the euro and, according to available estimates, almost entirely due to growth in total factor productivity ( tfp ). in portugal, growth in labour productivity has been less than 1 % per year on average, reflecting subdued tfp growth. in the decade before joining the euro area both portugal and ireland went through a boom, with annual average gdp growth rates at 2. 8 % and 6. 7 %, respectively ( 1990 – 1998 ). this strong growth masked substantive differences. while fiscal policy was pro - cyclical in portugal, reinforcing domestic demand pressures, it was much more disciplined in ireland. while growth in unit labour costs and hicp inflation was high in portugal ( 7. 6 % and 6. 2 % on

degree, even if it is less stimulative than today. by this, we mean that interest rates may need to remain below the neutral range until various forces have dissipated. these would include, in particular, the uncertainty around trade conflicts and escalating geopolitical risks. we have reviewed our work on the neutral interest rate and concluded that it still lies somewhere in the range of 2. 5 to 3. 5 per cent, given a 2 per cent inflation rate. another useful benchmark that entered our discussions was the real policy rate, which takes into account the rate of inflation on the policy rate. today, this benchmark is at minus 0. 75 per cent. it is the view of governing council that the need for a negative real policy rate continues to diminish steadily, albeit gradually. most of our deliberations, therefore, concerned the appropriate pace of interest rate increases. as we have said repeatedly in the past, this is an intensely data - dependent process of risk management. we continue to be faced with four key sources of uncertainty around the outlook for inflation. each of these represents the potential for either upside or downside risk to the inflation outlook, and therefore needs to be assessed to ensure that our risks remain balanced 1 / 2 bis central bankers'speeches around the 2 per cent target. first is the issue of economic capacity. we have done our extensive annual reassessment of economic potential and revised its profile higher, both in terms of its level and growth rate. this means that we have a little more room for demand growth within our 2 per cent inflation target than we believed before. related to this, it is becoming increasingly evident that canada ’ s international competitiveness challenges are hampering our export performance. many firms are operating at or above their capacity, but are hesitating to invest in new capacity given the uncertain future of the north american free trade agreement, transportation bottlenecks and a shortage of skilled workers, to name a few issues. this reluctance to expand capacity, in turn, also serves to limit growth in our exports. it is possible that this represents a structural change in the canadian economy, and the resolution would lie beyond the capability of monetary policy. for the central bank, the net effect on the inflation outlook will be our guide. the bank is continuing to work on these issues and will offer more research in time for our next mpr in july. the second issue is the dynamics of inflation itself. recent data have been very