Good morning, ladies and gentlemen. Today, we released our Update to the October Monetary Policy Report, in which we discuss economic and financial trends in the context of Canada's inflation-control strategy.

Core inflation has been higher than anticipated in recent months. This reflects not only a stronger-than-expected increase in premiums for auto and home insurance, but also some broadening of price pressures resulting from strong demand in the economy. Based on analysis of the inflation data and other indicators of pressures on capacity, we believe that the economy may be operating closer to its production potential than we thought previously.

In the second half of 2002, the Canadian economy slowed to an annual growth rate close to potential, which we estimate to be 3 per cent. This slowing reflected the effects of financial and geopolitical uncertainties and weakness in the global economy. In the Bank's base-case projection for the Canadian economy, demand pressures are expected to strengthen in the second half of 2003 and into 2004, following growth at slightly below potential in the first half of this year.

We project that the core and total inflation rates will decline through 2003, as the effects of the one-off factors diminish. But both core and total CPI will likely still be somewhat above 2 per cent at the end of the year. Total CPI inflation will continue to be affected by developments in crude oil prices. If these prices were to stay at current levels of just over US$30 per barrel, total inflation could move up to between 4.0 and 4.5 per cent in the first quarter. If, however, oil prices ease back in the second half of the year, as indicated by futures prices, total inflation is projected to move down, back in line with core inflation.

Monetary policy is currently very stimulative, and a reduction of this stimulus will be needed to return inflation to the 2 per cent target over the medium term. A number of elements will come into play in determining the pace of increase in policy interest rates. Although much of the recent rise in inflation has been the result of one-off factors, we cannot rule out the possibility that demand pressures are becoming more prominent. As well, there is a risk that inflation persistently above the 2 per cent target might lead to an increase in inflation expectations. Although we have seen an improvement in financial conditions, business and investor confidence remain fragile because of uncertainty about the geopolitical situation. And the way in which events in the Middle East unfold could affect demand and inflation, both globally and in Canada.