raw materials. and that, in turn, is pushing up the prices of these raw materials. certainly, we have seen the effect of this demand on most commodity prices. of course, one price increase that we all feel acutely is that of oil. the recent surge in crude oil prices is another example of pressure stemming, at least in part, from strong world demand. this stronger demand has not yet been met by compensating growth in the supply of crude oil - although a recent agreement by opec to boost production will help. nor have we seen substantial efforts by price - sensitive consumers to use less oil and gas. meanwhile, geopolitical events have contributed to concerns about potential supply disruptions, exacerbating the run - up in oil prices. it is reasonable to expect that oil prices will remain relatively high until some of the geopolitical uncertainty dissipates, world production capacity expands, and further conservation efforts take hold. higher energy costs mean that it will be more expensive to produce many goods and some services. it is not clear to what extent companies will be able to offset rising costs and limit price increases to consumers. what is clear is that economies need to adjust to these higher costs - and economic policies must support that adjustment. we have learned this from the mistakes made during the oil crisis of the 1970s, when many countries, including canada, tried to shield their economies from the effects of rapidly rising energy prices. the result was an eventual adjustment that was slower and more painful than it needed to be. a return to more normal world interest rates a second adjustment underway in the global economy is the return to more normal interest rates and somewhat wider spreads on risky investments. after the global economic slowdown of 2000 and the terrorist attacks of 11 september 2001, central banks around the world lowered their policy interest rates to provide the liquidity to help their economies recover and absorb excess capacity. the world economic recovery we are seeing is due, in large part, to accommodative monetary policy - that is, historically low interest rates. through 2003 and the early part of 2004, interest rates in some countries hit their lowest levels in 50 years, and global credit conditions were very expansionary. but we know from experience that, as growth resumes and economies get closer to their production capacity, inflationary pressures start to build. and so central banks in many countries will have to remove some of the stimulus, and interest rates around the world will have to return to more

rate of about 3 per cent. this implies that the level of output in the economy is still significantly below its production potential. however, both final domestic demand and exports grew strongly in the first quarter. these indicators, along with more recent data, suggest that growth in the first half of 2004 is likely to be somewhat above 3 per cent. in our april monetary policy report, we said that we expected the economy to grow by about 2 3 / 4 per cent in 2004 and by about 3 3 / 4 per cent in 2005. we also said that core inflation - a measure of trend inflation obtained by removing eight volatile components from the consumer price index, as well as the impact of changes in indirect taxes on the remaining components - was expected to average 1 1 / 2 per cent over the remainder of 2004 and to move back up to 2 per cent by the end of 2005. information received since the release of our april report has been generally consistent with expectations about core inflation. but the sharp rise in world oil prices, in response to stronger - than - anticipated global demand for oil and heightened geopolitical uncertainties in the middle east, means that total cpi inflation over the next several months will be higher than the bank expected in april. it is important to note that while higher oil prices may push up the total cpi over the next few months, they should not feed through into higher trend inflation, as long as inflation expectations remain anchored around the 2 per cent target. conclusion to conclude, the world economy has undergone tremendous change in recent years. and we can be sure that there is more to come. while we canadians can remain confident of our ability to adjust to change, we must not be complacent. we should continue to work at strengthening our macroeconomic framework, enhancing our productivity, and opening up further to trade. that is the best way to ready ourselves for the challenges and opportunities that lie ahead.