Bank of Canada Deputy Governor Timothy Lane said persistent strength in the country’s currency is an “important risk” to the economy, and policy makers have “flexibility” to implement further stimulus if it’s needed, even with their key lending rate as low as it can go.
“If a stronger dollar were to alter the path of projected inflation relative to that presented in our July Monetary Policy Report, we would need to take that into account,” Lane said in a speech to the Canadian Association for Business Economics in Kingston, Ontario. “We retain considerable flexibility through the use of unconventional monetary policy instruments, including quantitative easing.”
Governor Mark Carney has already cut the benchmark overnight rate to a record low 0.25 percent, and said he plans to keep it there through June 2010 unless the inflation outlook changes. Lane’s speech today is the last public event before the next rate decision on Sept. 10, and he said in response to a question afterward that the central bank may extend the rate commitment if the recovery stalls.
If the recovery were delayed, “we would have to reassess what would be the appropriate time to start removing that stimulus.” “At this time, we consider that commitment through the middle of next year still to be appropriate,” Lane said. Currency Weakens
The currency, nicknamed the loonie, weakened following Lane’s remarks. It traded at C$1.0854 per U.S. dollar at 3:40 p.m. in Toronto, 0.9 percent weaker than C$1.0762 yesterday. One Canadian dollar buys 92.13 U.S. cents.
The central bank’s July economic forecast assumes Canada’s currency will average 87 U.S. cents through 2011. Lane repeated the Bank’s analysis that recent strength reflects higher commodity prices and “generalized weakening of the U.S. dollar.”
Lane said the central bank’s analysis of the currency was tied to its impact on meeting a 2 percent inflation target. “We haven’t changed our basic framework,” Lane said. “We have to look at the exchange rate in that broader context, and not in isolation.”
Since the beginning of the year, the Canadian currency has appreciated 12 percent against the U.S. dollar, including the biggest monthly gain on record in May. The higher currency makes Canadian goods less competitive, and can slow inflation by making imports cheaper.
Economy Growing Again Canada’s economy has already started growing again, which would end a recession that began last year, the central bank said July 23, predicting expansion at a 1.3 percent annualized pace in the July-September period. The economy won’t operate at its full potential until the middle of 2011, the July Monetary Policy Report said.
Yesterday’s Statistics Canada report that retail sales rose 1 percent in June is an example of better-than-expected consumer demand, Lane said, adding he has a “concern” that households are “bringing forward spending that might happen later on.”
Lane “did seem to stick very tightly to the script, which is to say that the economic outlook portrayed a month ago was maintained,” said Eric Lascelles, chief economics and rates strategist at TD Securities Inc. in Toronto.
Lane was making his first public address since joining the six-member interest-rate panel in February. There are few chances for deputy governors to introduce their own views on monetary policy since the Governing Council works by consensus and individual votes aren’t published. Lane, 54, has a doctorate degree in economics from the University of Western Ontario, and used to work at the International Monetary Fund.