Good morning, Mr. Chairman, and members of the Committee. Before I begin, allow me to introduce Paul Jenkins, the Bank of Canada's Senior Deputy Governor.

We appreciate the opportunity to meet with you twice a year, following the release of our Monetary Policy Reports. These meetings help us to keep Senators 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.

The last time that I appeared before this committee was after the release of our April Report. Since then, our economy has been hit by a number of unusual shocks. Because of these shocks 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.

The prospects for near-term growth in the global economy have improved since April, and geopolitical uncertainty has continued to decrease. Looking forward, 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.

But I want to emphasize that 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 about both 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.

Let me also stress that we are assessing, and will continue to assess, the implications of all developments—both past and future—for output and inflation in Canada, and what this means for monetary policy going forward.

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