This morning, we released our Update to last November's Monetary Policy Report . In that Report , we indicated that, in the wake of the 11 September events, the timing and extent of a rebound in economic activity in Canada this year would depend crucially on geopolitical developments and on how soon consumer and business confidence returned to normal.

Since then, the geopolitical climate has improved and consumer confidence has recovered in both Canada and the United States. So, even though robust growth is not yet underway, it is now clearer that our economy will gather momentum as the year unfolds.

Economic developments in Canada since the November Report, and the profile for growth outlined in the Update, suggest that the amount of slack in the economy through 2002 will likely be somewhat greater than assumed in November. Thus, core inflation is now seen averaging just under 1 1/2 per cent in the second half of 2002. Total CPI inflation should remain below the core rate until late 2002.

Against this background, the Bank has lowered its key policy interest rate by 375 basis points over the past 12 months. This substantial monetary easing should support growth in domestic demand. Thus, the rate of economic expansion should pick up during 2002 and the amount of slack should gradually diminish. Consequently, inflation should be back close to 2 per cent in about two years.

I would now like to say a few words about recent exchange rate developments that are a source of concern.

Over time, exchange rates should reflect underlying economic and financial developments and prospects. But in the short run, there can be volatility as markets gauge those prospects.

As I have already noted, it is becoming clearer that our economy will strengthen as we go through this year and into 2003. Recent data increasingly support the view that a recovery is taking hold. Household spending in Canada, particularly on interest-sensitive purchases, has been stronger than expected. The latest data on exports and manufacturing activity show signs of recovery. The inventory adjustment is progressing. And with early evidence of a revival in the U.S. economy, the world prices of non-energy commodities appear to have bottomed out.

These signs of a pickup in economic activity in Canada are encouraging. But the recent movements in the Canada–U.S. exchange rate do not appear to have reflected those developments and the recent depreciation is not helpful for the economy. Economic recovery in Canada does not hinge on the current low levels of the Canadian dollar against its U.S. counterpart.

Let me sum up. When the final data come out, we could very well see positive, albeit modest, economic growth in both the fourth quarter of 2001 and the first quarter of 2002. Economic activity should gain momentum as the year progresses. Of course, some uncertainties remain, and the Bank will stay alert to unfolding developments.