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An effective exchange rate is a measure of the value of a country's currency vis-à-vis the currencies of its most important trading partners. The Bank of Canada has created a new Canadian-dollar effective exchange rate index (CERI) to replace the C-6 index that it currently uses. The CERI uses multilateral trade weights published by the International Monetary Fund and includes the six currencies of countries or economic zones with the largest share of Canada's international trade. As such, it better reflects the recent changes in Canada's trade profile, including the rise in the importance of China and Mexico and the relative decline in importance of Europe and Japan in Canada's international trade. The author describes the methodology and construction of the new index and reviews the advantages it offers over the C-6, particularly the use of multilateral trade weights, the inclusion of trade in services, and the use of more recent trade data.

Overall, the outlook for economic growth and inflation in Canada is largely unchanged from that set out in the April Monetary Policy Report.

The results of this Business Outlook Survey are broadly in line with those of the previous one.

Beginning with a review of the adoption of inflation targeting in a broad group of countries, Paulin focuses on changes in the design of inflation-targeting frameworks in light of fifteen years of accumulated experience. Included in the discussion are the use of numerical targets and ranges, the policy horizon, supporting institutional policy structures, and communication, including the publication of forecasts. A recurring theme is how much flexibility an inflation-targeting regime allows. The article concludes that the changes made to the frameworks have been relatively modest since their adoption, but in concert with the improved credibility that has resulted from central banks meeting their inflation-control targets, they have allowed an increasingly nuanced response to economic shocks.

Cover page

Irish Gun Money

The coins pictured on the cover are part of the National Currency Collection of the Bank of Canada.
Photography by Gord Carter

The financial system makes an important contribution to the welfare of all Canadians. The ability of households and firms to confidently hold and transfer financial assets is one of the fundamental building blocks of the Canadian economy.

This article sets out the Bank’s mandate for regulatory oversight of clearing and settlement systems, the strategy that is followed, and the key activities relevant to the conduct of oversight.