rates rise to compensate savers and lenders for expected higher inflation and for the risks caused by uncertainty about future inflation. none of this encourages productive investment. in the high - inflation days of the 1970s and 1980s, a lot of economic resources were instead devoted to hedging and speculative purchases. and inflationary booms - here and elsewhere - inevitably turned into busts. we must not let this happen again. that is why the bank of canada and the government of canada have agreed to an explicit target for inflation control. this target aims to hold inflation inside a range of 1 to 3 %. inflation - control targets also ensure that monetary policy works to moderate fluctuations in output, employment, and incomes. in the nine years since the targets were first adopted, not only has underlying inflation been lower than in the previous two decades, but economic growth has strengthened and has shown less short - term variability. as we move ahead, we must ensure that this situation continues and that we avoid the boom - bust cycles of the past. granted, we will not be able to wipe out fluctuations completely. external shocks will still buffet canada ’ s very open economy every now and then. and we will get economic surprises on the domestic front too. but in the past, our economic ups and downs were often amplified by outbreaks of inflation. keeping the economy on an even keel so how is the canadian economy performing these days and what is the bank of canada doing to help keep it on an even keel? our economy has been expanding solidly for some time now - even through the asian financial crisis of 1997 - 98 - creating the conditions for the healthy gains in employment and incomes that we are now seeing. since mid - 1999, the economy has outperformed expectations - growing in excess of 5 % at annual rates and with an underlying rate of inflation that, excluding fluctuations in energy prices, has remained in the bottom half of our 1 to 3 % target range. the bank has raised its projection for growth in 2000 to a range of 4 to 4. 5 % because of stronger demand for canadian products from both domestic and foreign sources. when it comes to foreign demand, this stronger momentum reflects faster - than - expected growth in several parts of the world, including europe and the emerging - market economies that were in the eye of the asian storm. even in japan, where the outlook continues to be uncertain, economic conditions should improve this year. but by far the greatest source of this stronger external stimulus is the tremendous bu

##oyancy of demand in the united states - a market that absorbs over 80 % of our exports. demand in that country continues to steam ahead and to push hard against the limits of production capacity. and signs of price and wage pressures have become more visible. that is why the us federal reserve has raised interest rates six times in the past 12 months to cool down the economy. the bank of canada has also been concerned that the greater - than - expected us demand for our exports, along with the strong momentum of spending by canadians, could lead to undue pressure on our production capacity and consequently on future inflation in canada. with us monetary actions reinforcing our view about the risks of a buildup of demand and inflation pressures in that country - a buildup which could spill over into canada - we have raised interest rates four times since last november. in this connection, i would like to highlight a couple of important points that sometimes get lost in the public commentary. monetary policy actions aim at future inflation first, monetary policy is concerned with future inflation pressures. monetary policy works with relatively long lags. it takes between 18 and 24 months for a change in interest rates to work through the economy and have an effect on inflation. for this reason, any actions taken by the bank of canada today must be based largely on considerations about the economy and inflation 18 to 24 months down the road - not on what is happening now and not on the current rate of inflation ( except to the extent that these factors colour our view of the future ). so, even though the underlying rate of inflation has been in the lower half of the 1 to 3 % target range, the bank has to consider what is likely to happen to prices in the future. monetary policy actions are based on economic prospects here at home the next point i would like to stress is that canadian monetary policy decisions focus, first and foremost, on the economic outlook here in canada. so, the critical element is the bank ’ s assessment of the balance of forces at work in the canadian economy, and what this means for future inflation. if domestic demand here in canada was not particularly strong, greater - than - anticipated us demand for our products would be a compensating element and hardly an issue. but if domestic demand was already rising rapidly, and the canadian economy was operating at high levels, the spillover of strong us demand would have the potential to strain our production capacity and lead to higher inflation in the future. the important judgment that