is particularly clear when the change in the exchange rate is as large as it has been recently : in less than two years, the canadian dollar has lost more than 20 per cent in value against the u. s. dollar. the effect of this depreciation on exports and the real economy is already evident. it has improved the competitiveness of canadian producers. export categories that historically have been sensitive to exchange rate movements are showing stronger activity. examples include building and packaging materials, furniture and fixtures, clothing and textile products, and large motor vehicles ( e. g., heavy trucks and buses ). exports of services, which constitute about 15 per cent of total exports, are also benefiting. the pass - through effects are also quite significant. they are estimated to be adding 0. 9 to 1. 1 percentage points to total cpi inflation ( chart 8 ). 7 so how does monetary policy react? if the change in the exchange rate is seen as a temporary factor reflecting other structural changes, it is clearly appropriate to look through the pass - through effects in assessing underlying inflation and in making policy. that is the case at the present time. the depreciation of the canadian dollar is driven mainly by two factors. first, it is associated with the sharp decline in canada ’ s terms of trade as the prices of oil and other canadian commodity exports have decreased. these commodity price developments are, in turn, a result of the dynamics of supply and demand for those commodities in a global market, certainly not a result of canadian monetary policy. 8 second, it is part of the general strengthening of the u. s. dollar as that economy strengthens and the federal reserve moves closer to normalizing monetary policy. by that logic, we exclude the direct impact of the pass - through effect of the exchange rate movement in assessing underlying inflation. therefore, we judge that underlying inflation is around 1. 5 to 1. 7 per cent. of course, the effect of the weaker canadian dollar in stimulating the canadian economy is an essential element of our projection that underlying inflation will return sustainably to target, with the economy back to its potential, over the next couple of years. m. khan, l. morel and p. sabourin, “ a comprehensive evaluation of measures of core inflation for canada, ” discussion paper no. 2015 – 12, bank of canada, 2015. l. savoie - chabot and m. khan, “ exchange rate pass - through to consumer prices : theory and

, an emergency situation where the market fails for some reason. still others have suggested that the bank could offer the exchange market verbal guidance about what the value of the dollar should be. behind this suggestion is a presumption that the bank has a better understanding of the macroeconomic fundamentals driving the dollar than the market. this is a difficult claim to defend. our exchange rate depends on a host of domestic and foreign fundamentals, many of which are beyond the bank ’ s influence. better that these myriad effects be weighed, debated and wrestled with in a deep marketplace than in a simple statistical model developed by the central bank. in short, i believe in markets. manipulating or trying to guide them is just not in our game plan. what the bank has done and will continue to do is be as clear as possible about how it sees the forces at play in the economy, and where the major sources of uncertainty and risks lie. to bring this uncertainty more into the policy dialogue, we have made some changes in the past year to how we analyze and talk about monetary policy. our efforts reflect the fact that the business of central banking is being adapted in real time to the changing environment. we have begun putting our growth and inflation forecasts in the form of ranges rather than points, and have given even more prominence to uncertainty and risks in the monetary policy report. we have refined our analysis of financial stability risks and raised the profile of our financial system review. and, we have begun to offer a more fulsome description of how those risks are entering our policy deliberations. these changes have brought more bis central bankers ’ speeches transparency to policy decision making, and our policy narrative has shifted from one traditionally seen almost as “ mechanical engineering ” to one now characterized as “ risk management. ” getting home – a natural sequence let ’ s talk about that policy narrative now. in the aftermath of the financial crisis, our export sector contracted significantly. the household sector picked up much of the slack in response to record - low interest rates, especially by investing in housing. but we cannot rely on policy - induced growth to maintain our living standards forever. the canadian economy requires a major rotation toward a more sustainable growth track. first, we need a substantial recovery in exports, canada ’ s natural engine of economic growth. from that will follow more investment spending by companies, accompanied by more employment growth. all of this will help absorb our spare capacity, bringing inflation sustainably to our target of 2 per cent. and