mr. thiessen discusses some important issues and challenges facing monetary policy in canada in the period ahead notes for remarks by the governor of the bank of canada, mr. gordon thiessen, to the vancouver board of trade in vancouver, british columbia, on 7 / 10 / 97. the challenges ahead for monetary policy today, i would like to talk about some of the important issues and challenges facing monetary policy in the period ahead and how the bank of canada proposes to deal with them. this is not an unusual topic for me since the business of central banking is seldom without challenges. but what a difference the past two years have made to the challenges we face! let me remind you that it was in late 1995, when investors ’ concerns about canada ’ s fiscal and political problems finally began to recede, that the bank of canada was able to take action to provide substantial monetary support to the economy. this action, which continued over the next year or so, was designed to offset both the direct impact on the economy of fiscal restraint and the effects on consumer confidence of the difficulties and uncertainties arising from the major restructurings that were necessary in both the private and public sectors. in response to the monetary stimulus, the economy has gathered momentum and finally seems to have pulled free from the difficulties associated with the restructuring. indeed, economic activity has accelerated this year and has expanded by about 4 per cent over the course of the past 12 months. with the economic momentum expected to continue at a solid pace in the period ahead, monetary policy now faces new challenges. over the next year or two, as the remaining slack is absorbed and we move towards full use of the economy ’ s capacity to produce, the issue for monetary policy will be to try to ensure that this process goes smoothly and that inflationary pressures do not re - emerge. further down the road, we will also have to concern ourselves with the conduct of monetary policy as the economy operates under conditions of full capacity. with all the structural changes that have taken place in canada and around the world in recent years, one important issue will be to gauge just how rapidly our economy can grow on a sustainable basis - - that is, without generating inflation pressures - - and what this implies for the employment picture in canada. the challenge for monetary policy at that stage will be how best to deal with the uncertainty surrounding estimates of the economy ’ s potential to produce. the conduct of monetary policy through the economic upswing and then under conditions of full capacity are the

two topics i would like to discuss with you today. returning to full capacity let me start with the immediate challenge for monetary policy - - to promote monetary conditions that will preserve canada ’ s good inflation performance through the current economic upswing, thereby helping to make this economic expansion a long - lasting one. as i mentioned, monetary conditions in canada have been very stimulative for over a year. with growing evidence that economic activity was expanding smartly, the bank of canada began reminding canadians that, as slack in the economy is taken up, there would be a need to move to less - stimulative monetary conditions. we took a step in that direction last week when we raised our bank rate by ¼ of a percentage point to 3¾ per cent. this kind of action can set off alarm bells in the minds of some people. they may wonder why the bank of canada is “ slamming on the brakes ” when the economy has only just begun to pick up and the unemployment rate is still high. i would like to respond to any such concerns by explaining what canadians can expect from their central bank in the period ahead and why. but before i do so, i would like to remind you that, when we at the bank talk about how stimulative monetary conditions have been, we are not just looking at short - term interest rates ( which are still near their lowest levels in decades and well below comparable u. s. rates ). monetary conditions also take into account the effects on the economy of changes in the exchange rate for the canadian dollar. for example, the relatively low value of our dollar has been a major source of stimulus for canada ’ s export sector. so a proper assessment of the degree of monetary ease in the economy has to consider both our low interest rates and the relatively low canadian dollar. now, what about the perception that any move by the bank of canada to less - stimulative monetary conditions means “ slamming on the brakes ” for our economy? let me stay with the automobile analogy for a moment. to get the economy moving, the bank has been pressing hard on the monetary accelerator. but once the economy picks up speed, just as with a car, you need to ease off gradually on the accelerator and steady your cruising speed at a safe level. if you press hard on the accelerator for too long, you will reach speeds that are unsafe. you risk losing control and getting into serious trouble. the same holds true for the economy. too much monetary