September 21, 2015 / 6:44 PM / 2 years ago

UPDATE 2-Bank of Canada: Weak C$ helps adjustment to cheap oil

3 Min Read

(Adds remarks on oil dependency and on China)

By Mike De Souza

CALGARY, Alberta, Sept 21 (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.

"Canada has seen this movie before; we've managed well in the past, and I'm confident we will continue to manage it well in the future," he said.

He did underline the uncertainty surrounding oil, saying that based on conversations he has had in the last couple weeks, many oil firms are still revising their longer-term crude price forecasts.

However, in a question-and-answer period, Poloz took issue with the idea that Canada was too resource-dependent, saying the economy remained highly diversified but that resources were good for any economy to have.

In his speech, he said the declining Chinese growth rate had impacted resource prices, but he noted the Chinese economy is the world's second largest and would remain resource-intensive for quite some time. (Writing by Randall Palmer in Ottawa; Editing by Alan Crosby)

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