When the economy is operating well below its production capacity and inflationary pressures are likely to ease, the Bank will lower interest rates to stimulate growth. This was the situation we found ourselves in during the past year, as signs of the slowdown emerged. By working in a symmetrical way, inflation targeting helps to level out the peaks and valleys of the business cycle.
It promotes sound growth while tempering economic ups and downs. And this benefits everybody. But the benefits of this framework go beyond its usefulness in setting monetary policy. It also helps reduce uncertainty about future inflation, by giving Canada a credible anchor for its monetary policy. Let me explain what that means.