Canada fiscal plan has taken pressure off central bank: Schembri

Tue Nov 8, 2016 1:24pm EST
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By Richard Woodbury

HALIFAX (Reuters) - Structural weaknesses are weighing heavily on Canada's export sector but an improved mix of fiscal and monetary policy has taken some pressure off the central bank to stimulate demand, a senior Bank of Canada official said on Tuesday.

Bank of Canada Deputy Governor Lawrence Schembri also said Governor Stephen Poloz believes the central bank still has unconventional tools left it can use to stimulate demand, but that the mix of fiscal and monetary policy in Canada is moving in a better direction.

"Achieving that better balance is really important for us because it relieves some of the pressure on the central bank to boost aggregate demand and reach our inflation target," Schembri told an economic policy think tank audience in Halifax.

The federal Liberal government said last week the budget deficit would reach C$25.1 billion ($18.8 billion) in the 2016-2017 fiscal year as it pours money into infrastructure spending in a bid to revitalize a limping economy, investment Poloz has supported.

The Bank of Canada cut interest rates twice in 2015 and has since held borrowing costs near historic lows, forced to repeatedly cut its outlook for exports and economic growth.

Analysts are divided over whether the bank's next move will be a rate cut or a rate hike, even with the U.S. Federal Reserve expected to increase rates as early as December.

In a speech highlighting how the bank overestimated Canada's export recovery, Schembri said there is good reason to believe exports should strengthen as the U.S. and global economies gain momentum.

He said that while a weaker Canadian dollar has helped exports in the past, other currencies have weakened more, hampering Canadian competitiveness. Furthermore, the central bank expects the currency to stay in its current range.   Continued...

A cargo ship is pictured at dawn in the Strait of Georgia off Vancouver, British Columbia , October 6, 2011.   REUTERS/Ben Nelms