- sharing arrangement among its members would have to be agreed upon. a substitution account would create considerable moral hazard, since reserve holders would be tempted to engage in further accumulation. in addition, a substitution account would not address the fundamental asymmetry of the adjustment process. thus, it would appear essential that a substitution account mark the transition from the current hybrid system to an international system characterized by more flexible exchange rates for all systemic countries. given the scale of international asset positions, progress on financial reforms is essential. these are also proceeding with a focus on three core issues : improving the resiliency of institutions ( raising the quality and level of capital ) ; building robust markets ( improving infrastructure and enhancing transparency ) ; and, reducing interconnectedness between institutions ( macroprudential management of systemic risk ). in each regard, interim measures have already been taken. most notably, china ’ s recent decision to enhance the flexibility of its exchange rate is welcome and its full implementation would contribute to strong, sustainable, and balanced global economic growth. european countries have taken measures to consolidate their fiscal positions and have conducted stress tests on their banks. the oversight board of the basel committee has released a broad detailed agreement on new definitions of bank capital and liquidity. with the macro analysis of tightening standards pointing to large net benefits, the calibration of these proposals will be decided shortly. successful implementation of the g - 20 financial reform agenda, when combined with the peer review process of the financial stability board ( fsb ) and external reviews by the imf, should increase actual and perceived systemic stability and thereby reduce incentives for reserve accumulation. this is a necessary condition for a more open, flexible, and resilient international financial system. the g - 20 framework will be buttressed by institutional changes currently underway. the g - 20 is now the premier forum for international economic cooperation. imf governance reforms will further enhance the fund ’ s legitimacy and effectiveness. over time, the fsb has the potential to become the fourth pillar of the bretton woods system. its expertise and broad membership should yield comprehensive and integrated global financial regulations. this will be essential to ensure ongoing cross border flows and to limit regulatory arbitrage and associated leverage. the final piece of the puzzle is the role of the imf itself. the crisis exposed enormous strains caused by currency mismatches and large international gross asset positions. these are not best addressed by further building international reserve positions concentrated in the same currencies. it is also unreal

; a record - high employment - to - population ratio ; corporate profits at their highest level since early 2001 ; and, as i said a few moments ago, above - target trend inflation. while we continue to foresee growth somewhat below potential in the first half of this year, we expect increased demand in the second half of 2003 and into 2004, as global uncertainties diminish. but with an appropriate reduction in the amount of monetary stimulus, we see the level of output remaining close to capacity during this year and into 2004. so, in making our interest rate decision on 4 march, we weighed the following considerations : domestic inflation pressures, the expectation that canadian economic activity will remain near potential in 2003 despite geopolitical uncertainties, the stimulative stance of monetary policy, and improved conditions in capital markets. taking all of these factors into account, the bank raised its key policy rate by one - quarter of a percentage point to 3 per cent. even with this increase, the stance of monetary policy remains stimulative. thus, over time, further reductions in monetary stimulus will be required to return inflation to the target over the medium term. but, as we have said, the timing and pace of increases in policy interest rates will continue to depend on a number of considerations. these include the strength of demand pressures ; the evolution of inflation expectations ; the impact on confidence of geopolitical and global economic uncertainties ; and the way in which developments in the middle east affect demand and inflation, both globally and in canada. the bank will continue to closely monitor all of these factors. * * * * * * * * * * * * * * * * * * * * * * * let me conclude. at the beginning of my talk today, i noted that, for over a decade now, canada has followed a policy based on the four key principles : trade liberalization, structural reform, fiscal prudence, and inflation control. it's never easy to follow those principles, but, over the medium term, they do lead to better economic performance. canada's recent economic record is evidence of that. we have maintained an enviable growth performance through what has been a very difficult period for the world economy. we remain optimistic - and so do others - that we will continue to do so. both the oecd and the imf predict that canada's economy will outperform those of other g - 7 countries this year. but these are