In light of the important economic and social benefits that low inflation and inflation targets have delivered, the federal government and the Bank of Canada recently agreed to retain the current target of 1 to 3 per cent. To increase the chances that inflation stays inside that range, the Bank will now be aiming expressly at the 2 per cent midpoint.
Moreover, the new agreement runs for five years, instead of three, to the end of 2006. Both of these changes should help to increase predictability and to reassure Canadians that low inflation will be a continuing feature of the domestic economic scene. Now, let us see how the exchange rate fits in all this and why Canada needs a floating currency.