This broad relationship is shown in Diagram 1 which compares the predicted exchange rate and the actual exchange rate using an equation which has been used in the Bank over the years. (By the way, there is nothing unique about this equation as several of the large banks active in the foreign exchange market have also used a similar formulation.)
In addition, the fact that monetary dynamics continue to be driven mainly by the most liquid components suggests that excess liquidity may entail risks of upward inflationary pressures in the medium to longer term.