b. zafar, “ measuring inflation expectations ”, annual review of economics, vol. 5 ( 2013 ) : 273 – 301. bis central bankers ’ speeches manufactured by companies in central canada will decrease. together, these effects will outweigh the benefits derived from the decline in oil prices on the energy bills of households and businesses. the net impact of this shock is significant : assuming no monetary policy response to the shock, we have calculated that average household disposable income would be reduced by 3 per cent by the end of 2016. moreover, through its impact on the real economy, the decline of about 50 per cent in the price of oil since june would knock roughly one - half point off the underlying inflation rate during the same period. it is against this backdrop that the bank lowered its key policy rate by a quarter of a point in january. the bank ’ s policy action is intended to provide insurance against downside risks to the inflation profile and financial stability risks, support the sectoral adjustment needed to strengthen investment and growth, and bring the canadian economy back to full capacity and inflation to target around the end of 2016. by doing so, it should also keep inflation expectations well anchored to the target. the concept of insurance is important and should be explained in greater detail. policy insurance is a logical part of our risk management framework for monetary policy. there is nothing mechanical about it. the cut in policy rate is intended primarily to provide insurance against the downside risks to inflation. many of the negative effects of lower oil prices on growth happen swiftly. there will be some offsets, such as the stronger u. s. economy and a weaker canadian dollar, but there are risks with regard to the timing and magnitude of these compensating effects. on march 4 we will come to our next interest rate decision. that decision will be based on a careful examination of how the economy, and the risks, are evolving. conclusion allow me to conclude. inflation expectations are central to the conduct of monetary policy. the bank has recently developed a new indicator of inflation expectations to enhance its other indicators. we are therefore better equipped to closely monitor and analyze expectations. i hope that my remarks have given you a clearer idea of the bank ’ s work and the challenges it faces. it is possible that, some day, one of our regional representatives will contact you to request your participation in the business outlook survey. you might also be asked to participate, as a consumer, in our new online survey.

the us economy, the relatively weak canadian dollar and increasingly competitive canadian manufacturers are allowing us to sell into the united states very successfully. what we are expecting to see now, however, is an increase here at home in consumer and business spending. we believe that the improvement in business and consumer confidence that we have seen in the last few months, the better employment picture and recent reductions in interest rates will all help support domestic spending. to be more specific, compared with six months ago, we at the bank have raised our projection for growth in the economy in 1999 to between 2¾ and 3¾ per cent. we have such a wide range because of the international uncertainties that i mentioned a moment ago. the high end of this range is well above the latest consensus among private sector forecasters. if the economy does grow at the higher end of this range, it is likely to be because of stronger exports and more substitutions of canadian goods for imports due to canada ’ s good price and cost performance. our economy should continue to expand next year at a broadly similar pace. on the basis of these growth forecasts, we would expect the trend of inflation to rise modestly over the next 18 months but remain in the lower half of the bank ’ s 1 to 3 per cent target range for inflation. there is an increasing level of confidence, both at home and abroad, that canada ’ s inflation will remain stable. another source of uncertainty for the bank at the present time is in estimating the margin of unused capacity in the economy. if economic activity expands as forecast, the traditional way of measuring these things tells us that the current margin of economic slack should be taken up in the second half of next year. however, the economy seems to have undergone some significant changes during the 1990s, and the traditional estimates of slack may no longer be accurate. as a result, the bank will be placing increased weight on a range of indicators to assess the degree of pressure on the economy ’ s production capacity. what we have in mind are such things as movements in inflation relative to expectations, growth of money and credit, wage pressures, evidence of supply bottlenecks and the information provided to our regional representatives from their business contacts. we will not know just how much the canadian economy has changed until its capacity limits come under more pressure. while the confidence of canadians in ongoing low inflation allows monetary policy more room to accommodate demand pressures that test the limits of capacity, it will be very important for the bank to be vi