, because monetary policy is forward - looking, we have to make a best possible evaluation of likely developments several quarters ahead. as we look to 2002, the timing and extent of a recovery in economic activity will depend crucially on geopolitics and on how quickly confidence returns to normal. as we discussed in our november monetary policy report, one can envisage two scenarios ( chart 3 ). in the first, confidence could be restored quickly, and robust growth could resume in early 2002, supported by the substantial monetary and fiscal stimulus already in place. in the second, confidence could stay fragile for some time, and growth would be anemic through most of 2002. note that, under either scenario, the canadian economy would still be operating at levels that are below capacity by the end of 2002. this means that inflation would continue to be below target through next year. how has the bank responded to all this? to underpin confidence in the wake of the extraordinary uncertainty generated by the terrorist acts, we took the exceptional step of lowering our key policy interest rate by 1 / 2 of a percentage point on 17 september, outside our regular fixed announcement schedule. and we moved again to ease rapidly — by 3 / 4 of a percentage point, on 23 october, and by 1 / 2 of a percentage point, on 27 november. the cumulative reduction in policy interest rates since the beginning of the year amounts to 3 1 / 2 percentage points, of which more than half — 2 full percentage points — occurring since late august. this substantial amount of monetary stimulus will work to support a resumption of healthy growth in output, investment, and employment, given canada ’ s solid economic foundations. in view of the ongoing uncertainties, it is still too early to characterize the economic outlook with great assurance. nonetheless, signs that the geopolitical situation may be stabilizing and that households and firms are beginning to adjust to the new environment, suggest a somewhat greater likelihood that the bank ’ s more optimistic scenario may come to pass than was the case a month ago. in closing, let me stress that i have oversimplified how the bank judges the performance of the economy relative to its potential. in addition, i have not mentioned all the factors that can influence the growth of potential or the future path of inflation. but i have provided the basic elements of the inflation - targeting approach that the bank uses to help promote good economic performance. mr. chairman, in my remarks today i focused,

##eu – namely the green transition and digitalization – might put a positive pressure on the potential output growth. investments in green and digital technologies could boost labor productivity and foster sustainable growth. consequently, the ultimate question we policy makers must find answers to is which factors will be dominating in the near future. with such long - term developments and the current circumstances, how should we balance economic slowdown and increasing prices? to be more precise, what weight should we give to the taylor rule variables and what time dimension of projections should we focus on? there is some merit to believe that structural forces that push neutral interest rate lower such as demographics, globalization and digitalization may not fade out - globalization may be an exception to some extent as i tried to explain - and a threat of the too - low inflation may return to our agenda. in other words, if the interest rate changes affect prices in one - to - two years ’ time only, how strong should we be in reducing our monetary policy accommodation? nevertheless, this does not change the fact that in the current environment we must tighten monetary policy to keep inflation expectations from increasing to unsustainable levels. de - anchored inflation expectations would make it much more difficult for the central bank to achieve its mandate of price stability. overall, i think we should gradually raise rates to retain credibility. we must be apprehensive, that, as the neutral rate is currently much lower, we cannot increase policy rates to the levels seen 15 - 20 years ago. still, as of this moment, it is extremely important to prevent the situation in which inflation expectations become entrenched at significantly higher levels than our inflation targets over the medium term. looking at the longer horizon, at the next strategy review, it is worth discussing what monetary policy framework is mostly fit for the new issues that relate to climate change risks, retreating globalization, and returning geopolitical threats. to this end, i am grateful for this opportunity to exchange the views in this panel discussion. monetary policy