itself. there have been several conjectures about the apparent softness of inflation in canada and many other advanced economies. some have argued that globalization is restraining inflation. this could be due to increased imports from lower - cost countries, for example, or the effect of canadian companies participating in global supply chains. others point to the impact of digitalization on the economy. they suggest that digital technologies could lower barriers to entry in some sectors and lead to more competition. the rise of ecommerce may be changing price - setting behaviour. and digital technologies could promote innovation and higher productivity, which could create disinflationary pressure. the second issue is the degree of excess capacity in the economy. we note several signs that point to slack remaining in the labour market. for example, the participation rate of young workers is still below trend, and average hours worked are less than we would expect. with the economy now operating close to capacity, we expect to see investment by companies, together 1 / 2 bis central bankers'speeches with job creation by new and existing firms, and rising productivity. this should serve to raise the economy ’ s potential output, increasing the amount of non - inflationary growth that is possible. however, this process is highly uncertain and not at all mechanical, so we have built it into our projection in a conservative way. the third issue is the continued softness in wage growth. while employment growth has been strong in canada, wages have not kept pace. the slack in the labour market is certainly responsible, in part, for this effect, and there will be a lag between the time this slack is used up and when we see stronger wage growth. however, other factors, including globalization, may also be affecting wage dynamics. finally, the fourth issue is the elevated level of household debt and how that might affect the sensitivity of the economy to higher interest rates. bank staff have recalibrated our main economic model used for projections to capture key information about housing and debt. this work tells us that the economy is likely to respond to higher interest rates more than it did in the past. however, we will watch incoming economic data closely for evidence to support this idea. we will also look to see how the household sector is responding to the new rules about mortgage underwriting. we also outline several other risks in the mpr. taken together, these give us a balanced outlook for inflation. we have not incorporated into our projection the risk of a significant shift toward more - protectionist trade policies

job with this. certainly the bank of france was successful in the early 1990s in building credibility as an inflation - fighting central bank. at that time, the bank of canada and the government of canada had come to a shared appreciation of the damage that inflation can do. so they made an important decision in early 1991. they announced a joint agreement to adopt explicit inflation - control targets. the agreement has been very successful in giving canada low, stable, and predictable inflation. it has been renewed three times — most recently for five years until the end of 2006. today, both the bank of canada and the european central bank are working to strengthen the economies in their jurisdictions. we both want to promote stable growth and rising living standards. and, importantly, we agree that promoting low and stable inflation is the best means to those ends. there are similarities between our inflation - control systems. for example, we both focus on inflation, and we both aim for price stability over the medium term. but there are also some differences that i want to highlight for you today. the bank of canada aims for price stability through its inflation target of 2 per cent. on the other hand, the european central bank has an inflation ceiling of 2 per cent, as measured by the harmonized index of consumer prices. this may look like a subtle difference, but it is important. for the bank of canada, 2 per cent is the midpoint of our 1 to 3 per cent inflation - control target range. it is a target, not a ceiling. our focus on that midpoint makes it clear that we run monetary policy in a symmetrical way. that is to say, we pay equal attention to any significant movement away from 2 per cent — whether above or below. when demand is strong, it can push the economy against the limits of its capacity to produce. this will tend to raise future inflation above its target midpoint. in these circumstances, the bank will raise interest rates to cool off the economy, and return inflation to the target. but this process also works in the other direction. when demand is weak, as we saw in 2001, this means that future inflationary pressures are likely to ease. so the bank will lower interest rates to stimulate the economy, absorb economic slack, and return inflation to the target. by working in a symmetrical way in response to surprises in demand, our inflation - targeting system helps to smooth the peaks and valleys of the business cycle. this promotes sound, and generally less variable, economic growth