Bank of Canada says strong commodities good for economy

Fri Sep 7, 2012 1:59pm EDT
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By Scott Haggett

CALGARY, Alberta (Reuters) - Bank of Canada Governor Mark Carney said on Friday that high commodity prices are unambiguously good for the economy and he made clear the central bank would not counter commodity-driven increases in the value of the Canadian dollar.

In a speech in Calgary, Carney dismissed the idea put forth by the country's main opposition party that the economy is suffering from so-called Dutch disease, wherein high commodity prices increase the value of the currency so much that the manufacturing sector is hollowed out.

Canada is a leading exporter of crude oil and its currency has been persistently strong against the U.S. dollar, hammering the competitiveness of manufacturers, many of which export primarily to the U.S. market.

"Most fundamentally, higher commodity prices are unambiguously good for Canada," Carney said, predicting that sustained global demand for commodities would keep prices elevated.

Carney said any moves by the central bank to curb commodity-driven movements in the value of the Canadian dollar would be futile in the long term. Taking such steps would eventually lead to volatile inflation and employment, and an estimated 1 percent cut in output over five years, he said.

"The logic of Dutch Disease requires that we undo our successes in order to depreciate our currency," Carney added. "Taken to its natural conclusion, this logic dictates that we shut down our oil sands, abandon our resource wealth, have high and variable inflation, run large fiscal deficits and diminish our financial sector.

"Such actions would surely weaken the Canadian dollar, but they would also weaken Canada," he said.

The Canadian dollar touched its strongest level in nearly a year on Friday after Canadian employment data showed the economy added 34,300 jobs in August, more than expected.   Continued...

Bank of Canada Governor Mark Carney listens to a question during a news conference upon the release of the Monetary Policy Report in Ottawa July 18, 2012. REUTERS/Chris Wattie