, relative to other prices. meeting the inflation target helps to anchor expectations of inflation, and that in itself helps to keep inflation low and the economy relatively stable. also, and importantly, the explicit goal of the inflation target acts as an anchor in our decision - making process at the bank of canada. let me now turn to the other key component of canada's monetary policy framework — the " float " — the flexible exchange rate. let's start with a basic question : why allow the dollar to float? the fundamental reason is that a flexible currency allows us to follow an independent monetary policy, a policy suited to our own economic circumstances. we wouldn't be able to address the particulars of the canadian economy if we set monetary policy with the goal of maintaining a fixed exchange rate. with just one instrument to carry out monetary policy, we can have only one target — and we target inflation. but there's another important reason for having a flexible exchange rate. just as a properly moored ship has some play in the mooring lines to absorb changes in the wind and the tide, the floating dollar helps the economy to absorb shocks — especially external shocks that affect our economy differently than the economies of our major trading partners. that is, it helps us adjust to shifting currents in the global economy. it's useful to think of the exchange rate as a relative price, a price that provides a good deal of useful information. movements in the exchange rate send signals to businesses and consumers, signals that help the economy adjust to changing circumstances. but just because the bank of canada does not have a target for the canadian dollar does not mean that we ignore the exchange rate. far from it. for any significant currency movement, we try to assess the implications for aggregate demand in canada, and thus the implications for monetary policy. and, as part of this analysis, we try to determine the factors driving a given movement. let me expand on this. interpreting currency movements the canadian dollar can rise or fall for a number of reasons. but, in principle, we can divide exchange rate movements into two categories — type one and type two. type one exchange rate movements reflect changes in the aggregate demand for canadian goods and services. type two movements reflect other factors. the key point is that these two types of currency movement have different implications for monetary policy. in general, there's less of a need for monetary policy to respond to a type one movement than to a type two movement. but just to

an estimated trend and a mean. 2 the greater the positive gap above trend, the stronger is the signal of vulnerability and imbalances. in line with the recommendations from the basel committee on banking supervision and from the european commission, there should not be a mechanical relationship between developments in the indicators and norges bank ’ s advice on the buffer. the advice will build on the bank ’ s professional judgement and take into account factors other than the indicators mentioned. the weight given to different indicators may vary. as we gain experience and insight, the set of indicators can be developed further. http : / / www. regjeringen. no / en / dep / fin / news / news / 2013 / systemically - important - credit - institutio. html? id = 726797. the trend is estimated using a one - sided hodrick - prescott filter ( lambda = 400000 ) extended using a forecast. the mean is for the entire period in the chart. bis central bankers ’ speeches uncertainty and the need for resilience suggest that the buffer should not be reduced automatically even if there are signs that financial imbalances are receding. in periods of prolonged lending growth and low losses, banks should normally hold a countercyclical capital buffer. banks will be allowed to draw on the buffer in the event of an economic downturn and large bank losses. if the buffer functions as intended, banks will tighten lending to a lesser extent in a downturn. this may mitigate the procyclical effects of tighter bank lending. the four key indicators are not well suited to signalling whether the buffer should be reduced. other information, such as market turbulence and loss prospects for the banking sector, will be more relevant. the benefits of higher capital requirements for banks must be weighed against any costs the countercyclical capital buffer imposes on the economy. several analyses, such as those conducted by the basel committee on banking supervision, suggest that higher capital requirements will not give rise to considerable, permanent economic costs in the longer term. 3 in the short term, higher capital requirements may result in lower growth in credit and overall gdp. analyses conducted by norges bank using norwegian data find similar patterns. 4 when credit growth is strong, a higher buffer requirement may restrain the build - up of financial imbalances. but if capital requirements are raised too quickly, the result may be excessive credit tightening. the level of the buffer must therefore be considered in the light of other capital requirements