Good afternoon, Madame Chair, members of the Committee. Paul and I appreciate the opportunity to meet with you twice a year, following the release of our Monetary Policy Reports. These meetings help us to keep Members of Parliament and all Canadians informed about our views on the economy, and about the goal of monetary policy and the actions we take to achieve it.

As you know, earlier today, we released our October Monetary Policy Report. The Report reviews economic and financial trends in the context of Canada's inflation-control strategy.

The last time that Paul and I appeared before this committee was after the release of our April Report. At that time, inflation was well above its 2 per cent target, and short-term inflation expectations had edged up. Although inflation was being pushed up by special factors, there were also signs that strong domestic demand was working to broaden pressures on prices.

Since April, our economy has been hit by a number of unusual shocks, including SARS, BSE, the Ontario electricity blackout, and the severe forest fires in British Columbia. Because of these and other factors, growth has been weaker than expected. We now estimate that there is more slack in the economy than we had projected in April.

Both total CPI and core inflation have fallen faster and further than expected. And virtually all measures of inflation expectations have decreased since last April. The drop in core inflation reflects several unforeseen developments: first, a broad-based weakness in the prices of goods, such as automobiles and clothing; second, the substantial fall in the value of the U.S. dollar; third, substantial reductions in the prices of tourism-related services because of the impact of SARS. As well, there has been a slightly faster easing of pressures from auto insurance premiums.

The prospects for near-term growth in the global economy have improved since April, and geopolitical uncertainty has continued to decrease. The economic picture in the United States is much improved. Recent data indicate that the anticipated recovery there is taking place earlier than previously expected. The economy in Europe is still weak, but prospects for Asia look bright, led by China and India. And the Japanese economy is performing better than anticipated.

We expect growth in the Canadian economy to strengthen during the fourth quarter of this year and through 2004. On balance, the expansion should be above the rate of potential growth, supported primarily by solid household spending and increased business investment. Stronger growth abroad should boost foreign demand for Canadian products, but this will be dampened by the higher value of the Canadian dollar. Growth is expected to average a little over 3 per cent in the second half of 2003 and 3 1/4 per cent in 2004. With growth above potential, the slack in the economy should be absorbed by early 2005.

We expect core inflation to average just over 1.5 per cent for the rest of 2003, and to fall to just above 1 per cent in early 2004, as the effects of earlier increases in auto insurance premiums dissipate. Core inflation should return to 2 per cent by mid-2005, as economic slack is taken up. Total CPI inflation will continue to be importantly affected by swings in the prices of oil and natural gas. If the price of crude oil eases to US$27 per barrel next year—as futures prices suggest it will—total CPI inflation would likely fall below core inflation in 2004.

However, there are significant risks to this economic outlook. These risks relate to the timing and magnitude of adjustments to global economic imbalances. In particular, there is uncertainty both about the likely changes in key global exchange rates and their effect on the Canadian economy. There is also uncertainty about the sustainability of U.S. growth beyond mid-2004.

We continue to assess the implications of all these developments—both past and future—for output and inflation in Canada, and what this means for monetary policy going forward.

Madame Chair, Paul and I will now be glad to answer the committee's questions.