Bank of Canada says focus remains on inflation

Tue Feb 26, 2008 2:28pm EST
 
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OTTAWA (Reuters) - The Bank of Canada said on Tuesday its focus, heading into next week's monetary policy announcement, remains on keeping inflation under control, despite concern the robust Canadian dollar is hurting sectors of the economy.

There are both downside and upside risks to the Canadian economy and targeting inflation is the best way to achieve economic stability, the bank's Senior Deputy Governor Paul Jenkins told a House of Commons industry committee.

"We have one tool at our disposal, which is interest rates, and we use that tool to achieve our objective, which is a 2 percent inflation target and we believe by doing that, we provide that best support for the Canadian economy overall," said Jenkins.

The Bank of Canada has been less aggressive than the U.S. Federal Reserve in cutting interest rates in the face of the U.S. economic slowdown, which has allowed the interest rate differential to open up a full percent in favor of a stronger Canadian dollar.

The Canadian dollar has risen around 60 percent since 2002 and the country's exporters have been shedding jobs as they try to adjust.

The main factors influencing the strength of the Canadian dollar are high commodity prices and the interest rate spread, said Jenkins.

A recent Reuters poll showed that a majority of Canada's primary security dealers expect the central bank to lower interest rates by 50 basis points to 3.50 percent on March 4.

That would narrow the interest rate differential between Canada and the United States to 50 basis points. But the U.S. Federal Reserve meets two weeks later and it is expected to continue its aggressive easing to bolster its economy.

Deputy Governor John Murray told the committee that if the exchange rate of the Canadian dollar was dramatically lower, the manufacturing sector might be more competitive, but the economy would operating in very high gear, with resulting inflationary pressures.

"I guess the only observation I'd make from that would be that what you think you might have gained from a lower exchange rate, you could probably find yourself losing in the form of higher inflation, so your competitive position, ultimately in manufacturing, would not be much changed."

(Reporting by John McCrank; Editing by Bernadette Baum)