Bank of Canada: Weak C$ helps adjustment to cheap oil

Mon Sep 21, 2015 4:19pm EDT
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By Mike De Souza

CALGARY, Alberta (Reuters) - The fall in the Canadian dollar has been an important factor in helping the economy adjust to lower oil and commodity prices, and the Bank of Canada must not stand in the way, Governor Stephen Poloz said on Monday.

"We can't do much about resource price shocks. But our policy can help the economy adjust to them," he said in a speech in Canada's oil capital of Calgary, Alberta, hit badly by the steep fall in crude oil prices.

"In particular, our floating exchange rate helps absorb some of the impact of the price movements and sends signals that facilitate adjustments."

Poloz, who used to head Canada's government export agency, has emphasized the need for a rotation away from household demand to exports and business investment, leading some analysts to suggest he is dovish on the dollar.

"The floating currency is helping to reduce the disinflationary risks that have come with the cut in our national income (from cheaper oil)," he said.

"Further, allowing the currency to float frees the Bank of Canada to concentrate our single policy tool on our single target, which is inflation. If we tried to offset these currency movements, we would end up frustrating the natural shifts in economic resources."

Poloz repeated that the bank would "look through" temporary upward pressure on core inflation that results from a lower currency boosting import prices. He reiterated the bank's estimate in July of underlying inflation of 1.5 percent to 1.7 percent.

Policymakers can help adjustments by encouraging economic flexibility, allowing necessary changes to take place and not frustrating the flow of investment or labor from one region to another, he said.   Continued...

A man is reflected in a window while walking past the Bank of Canada office in Ottawa, Canada July 16, 2015. REUTERS/Chris Wattie