in canadian monetary policy. explicit inflation - control targets were jointly introduced by the bank and the government of canada in 1991. since 1995, the goal has been to hold the trend of inflation inside a target range of 1 to 3 per cent, with emphasis on the midpoint of 2 per cent. inflation targets provide an anchor for policy and an anchor for people's inflation expectations. they supply the bank with an effective mechanism for assessing and dealing with demand pressures in the economy in a way that reduces fluctuations in output. here's how this'stabilizer'feature of the targets works. if total demand was pressing on the economy's capacity to produce, so that the future trend of inflation looked likely to move towards the top of the target range, the bank would tighten in order to reduce demand and inflation pressures. equally importantly, in a symmetric fashion, if demand was weak and future inflation looked likely to move towards the bottom of the range, the bank would ease, providing more room for the economy to expand. the basic point here is that the focus on inflation control allows the bank to support growth when the economy is weak and to prevent overheating when the economy is strong and is pushing against capacity constraints. the other important element of our monetary policy approach is a flexible exchange rate. a floating exchange rate allows our economy to adjust to economic disturbances such as a sharp change in foreign demand for our products or a sharp movement in the relative price of our exports compared with our imports. in cases like these, movements in the relative value of the canadian dollar help our economy to adjust with less fluctuation in output and employment than if the exchange rate did not move. and when our currency moves in response to those shocks, the inflation target helps to anchor expectations regarding its value in world markets. so the inflation target and a flexible exchange rate work well together — indeed they reinforce each other — under our current monetary policy framework. effective two - way communication in an increasingly interconnected world subject to all kinds of shocks and uncertainties, delivering a monetary policy that is credible and effective has become quite a challenge. the bank believes that greater openness and clear, two - way communication are important ways in which it can influence the economy, particularly at times of increased uncertainty. put another way, our actions will likely be more successful if those we seek to affect — the financial markets and the general public — understand what we are up to and why. the bank has made considerable progress in this area, and

country. since the exchange rate is a key price in our economy, the bank recognizes that movements in the external value of our currency can be a source of concern for canadians. i want to reassure you that we watch market developments closely. and we carefully assess financial market sentiment towards the canadian dollar and the implications of movements in its value for aggregate demand and inflation in canada. in closing, let me leave you with two key messages regarding our economic prospects. first, the bank continues to expect a pickup in growth in the second half of this year and further strengthening in 2002. however, there are uncertainties attached to this scenario, mainly stemming from external — especially u. s. — developments. for example, there is a risk that the slowdown in the united states could be more protracted than anticipated. the bank will have to monitor developments in this area closely. my second message is that there are good reasons to be positive about canada's economic prospects over the medium term. we have established a climate of low inflation. most canadian governments are running budgetary surpluses. as a nation, we have a large trade surplus with the rest of the world, and we are reducing our net foreign indebtedness. moreover, there are no serious speculative excesses in the economy. corporate and financial sector balance sheets are generally healthy. credit markets are functioning well. and although consumer debt loads have increased, with rising incomes and lower interest rates households generally are in a good position to service those debts. all this gives us a more solid basis to stand on as we go through this period of economic adjustment. and it provides a platform for future growth. the bank's role is to target low inflation and to work with others to promote financial stability. as i explained before, by targeting inflation the bank is providing appropriate support for growth in output and employment at this time of increased economic uncertainty.