Bank of Canada accepts short-run dollar gains

Wed Sep 23, 2009 11:20am EDT
Email This Article |
Share This Article
  • Facebook
  • LinkedIn
  • Twitter
| Print This Article | Single Page
[-] Text [+]

By Stephen Brun

SUMMERSIDE, Prince Edward Island (Reuters) - The Bank of Canada said on Wednesday it had to accept short-run volatility in its exchange rate but warned once again that a persistently strong Canadian dollar could curb growth.

Deputy Governor David Longworth referred to comments in the central bank's September 10 statement, "that persistent strength in the Canadian dollar remains a risk to growth and to the return of inflation to target, and that the bank retained considerable flexibility in the conduct of monetary policy at low interest rates."

The end of his quote is shorthand for saying the bank could use credit easing or quantitative easing, in effect printing money, if the currency showed persistent strength. However, he then clarified that by noting that sharp movements would essentially be ignored in the short run.

"Volatility is very difficult to deal with in the context of exchange rates, particularly short-term volatility. As an inflation-targeting country ... we focus on the effects of exchange rate movements on inflation over time and therefore we end up basically looking through short-run volatility," Longworth said after his speech.

"It's only if the effects persist that they're going to show up and have an effect on the real economy and the path of inflation. So, once you have chosen to have monetary policy independent and have your own inflation target and not tie yourself to another country, you've in effect made the choice that you're going to accept some volatility."

The bank's latest monetary policy outlook, on July 23, was predicated on a Canadian dollar worth 87 U.S. cents, or at C$1.1494 to the U.S. dollar. The currency has been substantially stronger than that since then and is currently around C$1.0740 to the U.S. dollar, or 93.1 U.S. cents.

Longworth did not say how long the Bank of Canada would "look through" currency volatility.

Most analysts believe the bank would be reluctant to engage in quantitative or credit easing, especially now that policymakers are beginning to think about exit strategies for economic stimulus measures, but the threat is always there.   Continued...