resume our business - as - usual asset purchases • what the likely drivers are of recent pressures in overnight funding markets our estimate of demand for settlement balances let me start with a bit of background about a crucial element of our balance sheet, one that is key to guiding our qt process. i ’ m talking about settlement balances — what most other jurisdictions call central bank reserves. these represent a liability on our balance sheet. 2 they are interest - bearing deposits held at the bank of canada that belong to members of lynx, canada ’ s high - value wholesale payment system, who use them to settle large payments with each other. lynx members include the biggest banks, which process the bulk of payments in canada and, as a result, hold most of the settlement balances. the interest rate that we pay on settlement balances is called the deposit rate. due to arbitrage in overnight funding markets, the rate for overnight repurchase — or repo — agreements in these markets tends to be at or close to our deposit rate. and since the deposit rate moves one - for - one with our target policy rate, this helps ensure that the one - day or “ overnight ” market rate used by financial institutions is also at, or close to, our target rate. when we change our policy rate, this implies an equivalent change in the deposit rate, leading to changes in the overnight rate and, in turn, influencing longer - term interest rates, such as on mortgages or business loans. this is how we implement our monetary policy and ensure that it is reflected in borrowing and lending rates throughout the economy. now, as i discussed in my speech last march, because we now operate in a floor system, our aim in steady state is to supply just enough settlement balances to satisfy the demand for them from banks and other lynx participants. 3 currently, though, the amount of settlement balances on our books is higher than our best estimate of that demand because of the balance sheet measures that we took during the pandemic. so, as we shrink our balance sheet through qt, we are lowering the supply of settlement balances toward our best estimate of demand. this lower level is really a range, because we use a few different approaches to estimate the demand for settlement balances. in estimating the overall demand for settlement balances in the financial system, we look at two types of demand. the first is payments - driven demand, which is the amount needed for canada ’ s high

gauge the strength of the economy as it approaches its capacity to produce and to reduce the amount of monetary stimulus in place in a timely and measured manner. what do we mean by those terms? " timely " relates to the fact that there is always a lag between our policy actions and their effect on the economy. we must be timely because our actions take a year to 18 months to have their full effect on output, and 18 months to 2 years to have their full effect on inflation. " measured " relates to the judgments that we will make as we approach full capacity. if the economic data going forward tell us that we are taking up excess capacity more quickly than expected, we would have to reduce monetary stimulus more quickly. but if the data suggest that the return to full capacity is going more slowly than we thought, we would then need to move more slowly. there are still important risks and uncertainties in the outlook. some are working on the upside and others on the downside. given the amount of monetary and fiscal stimulus in the economy, output growth could be even stronger than projected. but it is also possible that some of the recent strength in spending on consumer durables may have been borrowed from the future, so that the growth of household expenditures may be weaker than expected. at the same time, there is still considerable uncertainty about the timing and strength of the pickup in business investment in north america, mainly because of the continued weakness in profits. moreover, recent developments in the middle east could have implications for crude oil prices and the global economy. the canadian and u. s. situations on 16 april, canada became the first g - 7 country to raise interest rates following the most recent economic slowdown. central banks should always tailor their monetary policies to their own circumstances. and while canada faces many of the same risks as the united states, there are some differences in our situations that are worth noting. although the first - quarter national accounts data are not yet out in canada, we expect that final demand has made up a larger share of canada's growth in the first quarter, while the contribution to growth from inventories constituted a smaller share than in the united states. it is always difficult to measure excess capacity with precision. however, it is clear that the canadian economy is now nearer its level of potential than we expected it to be just a few months ago. the key issue facing both the u. s. and canadian economies is business investment — when it will resume and how strong that