gordon thiessen : update on economic and monetary developments in canada opening statement by mr gordon thiessen, governor of the bank of canada, before the standing senate committee on banking, trade and commerce, ottawa, on 6 april 2000. * * * i very much appreciate the opportunity to appear regularly before your committee. i would like to use this particular occasion to update you on economic and monetary developments as well as to discuss any issues that you may want to raise. let me first give you an overview of the developments in the past year. when i appeared before you last april, there was still a high degree of uncertainty in the global economy related to the 1997 - 98 financial crisis in emerging markets and the associated fall in world commodity prices. and because of these difficulties, the pace of economic activity in canada had slowed. but by mid - 1999, our economy had regained its momentum, supported by buoyant us demand, a rebound in commodity prices, and a pickup in domestic spending. over the four quarters of 1999, output expanded by about 4¾ % and 425, 000 new jobs were created, taking the national unemployment rate down to 6. 8 % by this february - its lowest level in 23 years. at the same time, the underlying rate of inflation remained low. why has canada rebounded so quickly from the external shocks of 1997 - 98? i believe it is because canada ’ s economic policy foundation is stronger today than it has been in several decades. this foundation has two cornerstones. one is the improved fiscal positions of governments that have led to a declining ratio of public sector debt relative to the size of our economy. the second is an environment of low and stable inflation that is expected to persist because it is anchored by the bank of canada ’ s target for inflation control. since the early - 1990s, canadian monetary policy has been based on a commitment to explicit targets for inflation control. this commitment has helped to moderate fears of a resurgence of inflation, has assisted the bank in taking timely action in response to changing economic and financial conditions, and has improved our public accountability. a crucial part of our monetary policy regime is our floating exchange rate. without that, we could not have canadian inflation targets. a good measure of the success of our monetary policy framework based on inflation targets and a flexible exchange rate is that canadian interest rates have remained lower than comparable us rates, apart from the period of turbulence in 1998. these lower rates reflect canada ’ s lower inflation rate, and the expectation

by the us federal reserve. the us actions provided additional evidence of the likely further spillover of us demand to our export sector. altogether, this suggests an overall demand for canadian output that is stronger than previously expected. under these conditions, it has been essential for the bank of canada to be vigilant. as i said before, our inflation performance, up to now, has been good - in fact, somewhat better than we had expected. while the 12 - month rate of increase in the total cpi moved up to 2. 7 % in february because of sharply higher energy prices, when one looks through those developments at the underlying trend of inflation, our core cpi measure ( which excludes food, energy, and the effect of changes in indirect taxes ) was at 1. 6 % in february. this is within the lower half of the 1 to 3 % inflation - control target range. when it comes to the surge in energy prices, let me just say that the bank of canada will be watching closely to ensure that the recent increase in energy prices does not show up in higher expectations of inflation. we expect that the recent decline in world energy prices will persist, bringing the rate of increase in the total cpi down, closer to the centre of our target range by late this year. i cannot stress enough the importance that we at the bank of canada place on keeping the future trend of inflation in canada low and stable. this is the best contribution that monetary policy can make to the continued expansion of the canadian economy and to further productivity gains.