yet we still lacked a robust monetary anchor and this contributed to a period of very high inflation that lasted through the early 1980s. the lesson for us is that orienting monetary policy toward achieving low and stable inflation can lead to better economic outcomes. 16 china only recently moved from pegging the renminbi to the us dollar to maintaining its stability against a basket of currencies. this has increased the variability of the renminbi / us $ exchange rate and allows for exchange rate movements that could facilitate deep structural adjustments. certainly, in canada, we ’ ve seen that our floating exchange rate supports structural adjustments, like the reorientation toward the non - resource sector under way today. my colleague deputy governor lynn patterson gave a speech about this last week – i recommend it to anyone who wants to learn more about this transition. 17 that said, if chinese authorities gear monetary policy toward supporting the exchange rate, there may be trade - offs with pursuing domestic objectives. moreover, the appropriate level of the basket itself changes over time, leading to speculative flows if the target level is not adjusted on a timely basis. chinese authorities have committed to further liberalizing the capital account. loosening restrictions on international flows, if managed well and at the right time, could help china ’ s transition. 18 liberalizing the capital account would help to complete markets and expand access to market financing within china. that said, liberalizing the capital account is one of the most difficult challenges that developing economies face. take the asian crisis as an example : countries liberalized their capital accounts before their financial systems were ready and suffered a currency crisis in 1997 that set their development back a few years. one of the lessons is the need for welldeveloped and resilient financial markets to allow for the pricing of risks and to accommodate large financial flows. this episode also illustrates that a lack of market - determined exchange rate flexibility can encourage excessive unhedged foreign currency borrowing. hedging raises the cost of foreign borrowing and would have limited excessive exposures. financial stability financial stability is the last piece of the puzzle i ’ ll mention. there are some points of concern here. in the aftermath of the global financial crisis, china embarked on a massive expansion of credit to support domestic demand. 19 china ’ s overall debt has grown much faster than the economy, now reaching some 285 per cent of gdp. around 60 per cent of this is in the non - financial corporate sector, mainly state - owned enterprises. this sector is where a

david dodge : monetary policy report a€ “ introductory statement opening statement by mr david dodge, governor of the bank of canada, at a press conference following the release of the monetary policy report, ottawa, 19 october 2006. * * * today, we released the october monetary policy report, which discusses current economic and financial trends in the context of canada's inflation - control strategy. the canadian economy is judged to be operating just above its production capacity. while global economic growth is expected to be a little higher than previously anticipated, a weaker near - term outlook for the u. s. economy has curbed the near - term prospects for canadian exports and growth. the bank's outlook for growth in the canadian economy has been revised down slightly from that outlined in july's monetary policy report update. the bank's base - case projection now calls for average annual gdp growth of 2. 8 per cent in 2006, 2. 5 per cent in 2007, and a return to 2. 8 per cent in 2008. weakness in labour productivity growth has led the bank to lower its assumption for potential growth to 2. 8 per cent for the 2006 - 08 period. together, these factors imply that the small amount of excess demand now in the economy will be eliminated by mid - 2007. core inflation is expected to move a bit above 2 per cent in the coming months but return to the 2 per cent target by the middle of 2007 and remain there through 2008. lower energy prices have led to a downward revision to the near - term projection for total cpi inflation. total inflation ( which includes the temporary impact of the gst reduction ) will likely average about 1 1 / 2 per cent through the second quarter of 2007, before returning to the 2 per cent target and remaining there through to the end of 2008. as we noted at the time of our 6 september interest rate announcement, the risks around the basecase projection are judged to be a little greater than at the time of the july update. the main upside risk relates to the momentum in household spending and housing prices, while the main downside risk is that the u. s. economy could slow more sharply than expected, leading to lower canadian exports. the bank judges that the risks to its inflation projection are roughly balanced. on 17 october, we left our key policy rate unchanged at 4. 25 per cent. the current level is judged, at this time, to be consistent with achieving the inflation target over the medium term. we at the bank will