We can use ToTEM to simulate the effect of the Bank leaning against a commodity-driven exchange rate appreciation through a reduction to the policy rate. In the short run, stabilising the nominal exchange rate helps to support non-commodity exports as well as Canadian producers who face competition from imports. But, ultimately, this effort is futile.
So we are starting to ask the question whether inflation expectations are being pitched too low, because people are fixated on a continuation of a very low oil price. Inflation expectations are well on course in the long term, so the whole discussion is about how fast they will come back to 2%, how fast inflation will come back to 2%?