This adjustment has helped keep overall supply and demand in balance and inflation pressures in check. In this sense, the past four years have been the reverse of the situation in 199798. Once again, the flexible exchange rate has helped to stabilize the economy and to encourage adjustment—this time in the context of strengthening terms of trade.
It's useful to compare these two recent terms-of-trade shocks—which occurred when monetary policy was anchored by an inflation target—with an earlier shock when monetary policy was not conducted with an explicit target. During 1997-98, when our terms of trade were weakening, CPI inflation averaged 1.3 per cent.