of policy rates, we do not outsource our monetary policy to the u. s. federal reserve. what happens in the united states obviously matters for canada, but this does not mean that our rates are tied to those of the americans. over the two decades of inflation targeting, the overnight rate in canada has been more than 200 basis points above, and more than 200 basis points below, the federal funds rate. these variations reflect differences in our respective economic outlooks. canadian monetary policy will be appropriate to canadian circumstances and consistent with achieving price stability in canada. canadians can also be assured that the bank will take the necessary steps to ensure that core financial markets remain liquid and operating. in the event of a major systemic shock, the bank has a wide range of tools to provide exceptional liquidity, consistent with a principles - based framework. this will help ensure that all canadians benefit from the strength of our financial system, in bad times as well as good. while we experience the fallout of events in europe and the united states, canada should also draw the lessons from these experiences. the european sovereign crisis reinforces the importance of sustainable government debt and the value of a flexible exchange rate. american difficulties underscore the risks of excessive household debt. should you wait out the storm? financial markets appear paralysed. you shouldn ’ t be. these events are like the waves on the sea. the underlying currents – those forces that affect the long - term outlook for our businesses and economy – are much stronger. today, the charts reveal three major currents : canadian firms are underexposed to the fastest growing parts of the global economy ; commodity prices can be expected to remain elevated relative to historic averages ; and our firms are not as productive as they could or need to be. regardless of what happens in the united states or europe, these challenges and opportunities need to be seized through sustained efforts here in canada. the world ’ s economic centre of gravity is shifting rapidly from advanced to emerging economies. the game in the united states will be more about taking market share ( something we have not been doing recently ) than participating in a growing market. to put it according to projections published since 1998 by the bank in our monetary policy report, this is the variance in the horizon over which inflation was projected to return to the 2 per cent target. bis central bankers ’ speeches bluntly, the u. s. economy can be expected to be relatively weak for some time as households repair balance sheets and governments wrestle with deficit

the bank of canada business outlook survey, " bank of canada review ( autumn 2005 ) : 19 – 25. international monetary fund, world economic outlook ( april 2007 ), 161 – 192. led to lower prices for many manufactured goods and higher prices for many commodities, particularly energy products. while both of these groups are represented in the total consumer price index, many energy prices are excluded from our core measure of inflation because of their volatility. in the pursuit of our 2 per cent target for total cpi, we use our core measure as an operational guide because it has been a good gauge of the underlying trend of inflation and has been a better predictor of future changes in the total index than has total cpi itself. forthcoming research at the bank of canada indicates that this relationship continues to hold in canada, although it has diminished in many other countries. 15 we will continue to monitor the stability of this relationship, and the bank will also continue to look at a range of measures to assess the underlying trend of inflation. considerable judgment must always be applied, and no one measure should be relied on exclusively. second, globalization may affect the degree and speed of the pass - through of exchange rate movements to domestic prices. it is widely believed that globalization acts as a stabilizer that should dampen exchange rate pass - through because the increased competition faced by businesses will lead them to compress their margins to remain competitive and absorb rising costs. 16 eventually, however, local prices should adjust to exchange rate movements, if they persist. we may, in fact, be seeing this effect here in canada, since some retailers in the automotive and book sectors have recently adjusted prices downwards in the face of greater competitive pressures stemming from the rise of the canadian dollar. third, globalization may have a conflicting influence on productivity. i have already mentioned how globalization promotes higher productivity by allowing firms to arrange their production processes in the most cost - effective ways. again, however, the reality in canada is more complex. the large swings in relative prices fed by globalization have sparked a reallocation of resources between sectors and regions. this reallocation can lead to a temporary slowing in productivity growth as the adjustments take place. this is particularly true in the natural resources sector, where investments typically have long lead times, where a substantial amount of labour has been absorbed, and where high commodity prices have encouraged the production of more marginal resources. these effects may be behind a portion of canada's disappointing productivity record in recent years. 17 fourth, the