lawrence schembri : the merits of a floating exchange rate remarks by mr lawrence schembri, deputy governor of the bank of canada, to the economics society of northern alberta ( esna ), edmonton, alberta, 17 june 2019. * * * introduction it is a pleasure to be in alberta for my speech today, given the importance of commodities, including oil, and their prices to the albertan and canadian economies. while it may seem that many of us think about the value of the canadian dollar only when we are about to travel, at the bank of canada, we view it as the most important price facing our economy because it directly affects much of what we produce, consume and trade. that ’ s why this is the right place to explore the critical role our flexible exchange rate plays in canada ’ s economy. and the time is right as well. canada has just entered its 50 th consecutive year with a floating currency, the longest of any country, dating from when it was last unpegged from the greenback in may 1970. this is my second speech in our public engagement campaign called “ toward 2021. ” we call it that because 2021 is the next renewal date for our five - year inflation - control agreement with the government of canada, first adopted in 1991. for the renewal, we ’ ve committed to a wideranging review of our monetary policy framework to ensure it best achieves our mandated goal of price stability and thereby promotes strong and sustainable output and employment growth for the benefit of all canadians. the framework has two components : our 2 per cent inflation target and our flexible exchange rate. the inflation target normally gets most of the attention, so the value of our floating dollar risks being overlooked at a time when the performance of flexible exchange rates is coming under greater scrutiny in international policy circles. my purpose today is to review the evidence and make the case that canada and many other open economies have been well - served by a market - determined flexible exchange rate. in particular, canada ’ s experience with inflation targeting underpinned by a floating currency is an instructive example of the most durable monetary policy framework in the post - war period. 1 the flexible exchange rate has helped our economy adjust to external shocks, primarily changes in commodity prices. although our floating currency does not completely offset the impact of all of these shocks, it has complemented the bank ’ s inflation target to help achieve low and stable inflation and keep our economy functioning well. while we ’ re not going to

rates unchanged and gathering more information to confirm the need to raise the policy rate. on balance, our assessment was that the cost of delaying action was larger than the benefit of waiting. elevated inflation is a burden on canadians, especially for the most vulnerable. we are also acutely aware that higher rates are making life more difficult for many canadians. and we know many canadians are asking : is the bank done raising interest rates, or will rates need to go higher still to relieve price pressures? the short answer is we will be taking each decision based on the information available at the time. 2 / 3 bis - central bankers'speeches what we can say is that monetary policy is working, and we know it will take more time for the full effects of past interest rate increases to work their way through the economy. with the increases in our policy rate in june and july, our outlook has inflation going gradually back to the 2 % target. but several things need to happen for inflation to continue easing. and we are particularly concerned about two upside risks to the outlook. first, we have been surprised by the persistence of excess demand and underlying inflation in canada and globally. we know that higher rates are having an impact, but how big their impact will be is uncertain. second, with the downward momentum in inflation waning and our forecast suggesting inflation will be around 3 % for the next year, we are concerned that the progress to price stability could stall, and inflation could even rise again if there are upside surprises. as i said, we are trying to balance the risks of over - and under - tightening. if new information suggests we need to do more, we are prepared to increase our policy rate further. but we don't want to do more than we have to. these decisions will be guided by our assessment of incoming data and the outlook for inflation. we need to see demand growth slow, wage pressures moderate and corporate pricing behaviour normalize. we will also need to see near - term inflation expectations and measures of core inflation come down further. let me conclude. the substantial drop in inflation over the past year is welcome news for all canadians. but monetary policy still has work to do - our job is not done until inflation is centred on our 2 % target. that is the level that helps the economy grow sustainably, restores competitive forces in the economy and gives canadians the price stability they need to budget and invest with confidence. with that summary, the senior deputy governor and i would be pleased to