TORONTO (Reuters) - Canada cannot devalue its way to prosperity or blame weak exports solely on the strong Canadian dollar, the head of the Bank of Canada said on Wednesday.
Speaking to an auto union that blames the strong dollar for higher costs for car makers, Governor Mark Carney noted that Canada’s export performance over the last decade has been the second worst in the G20 grouping of major and emerging nations.
“Some blame this on the persistent strength of the Canadian dollar. While there is some truth in that, it is not the most important reason,” he told the Canadian Autoworkers Union, describing over-exposure to the mature and sluggish U.S. market as a more important factor.
He said the currency accounted for only about 20 percent of Canada’s poor export performance.
“We cannot devalue ourselves to prosperity or cut ourselves off from the world and hope to rely on ever-increasing borrowing by Canadian consumers,” he said.
The CAW has been a tough critic of the strong Canadian dollar, arguing that it inflates the labor cost of making cars in Canada. The union is in contract talks with the Big Three Detroit car companies, seeking a share in the companies’ new profitability.
Carney’s speech was believed to be the first to the CAW by a Bank of Canada chief. CAW President Ken Lewenza, while telling Carney that the union disagreed with his policy, warmly welcomed him and asked him to sign up his four daughters as union members.
Carney said the Bank of Canada watches the dollar’s level as it sets monetary policy, but added that a dramatic shift in the currency’s value might not have as much of an impact as some would expect.
He cited commodity prices as a long-term factor boosting the currency. These “have been well above historic averages for a long time, and we think that’s something that’s going to continue for some time because of the growth in emerging markets.”
He also said Canada’s strong currency was influenced by investors perceiving Canada to be a safe haven “in a very volatile world.”
Over the last decade, the Canadian dollar has climbed from around C$1.60 to the U.S. dollar, or 62 U.S. cents, to comfortably above parity against the greenback, buoyed in part by Canada’s strong fiscal footing and commodity-powered economy.
On Wednesday, the currency hovered around C$0.99 to the U.S. dollar, or $1.01, and analysts expect it to maintain equal value with its U.S. counterpart for the next year at least.
Noting that interest rates remain very low, he defended the bank’s repeated statements that it would eventually need to remove stimulus from the economy, which means raising interest rates. His is the only central bank in the Group of Seven leading industrialized countries with a tightening bias.
Asked to justify this stance, he cited a relatively small amount of slack in the economy and near-record housing activity, and he said one had to “look through shorter-term wiggles in the data” — such as June’s fall in retail sales.
Carney has taken a more hawkish line than most central bankers, saying the Canadian economy’s underlying momentum was roughly in line with its potential for growth.
“Governor Carney stuck to his guns despite the softening Canadian economy. The downplaying of the strong Canadian dollar and the suggestion that the bank will support efforts by the federal government on the housing market, signal that the BoC (Bank of Canada) is not prepared to lower interest rates,” said National Bank economist Krishen Rangasamy.
Nonetheless, Carney said recovery from the global economic malaise would not be easy. “This is not a normal recovery and expansion, and we have fundamental challenges. This is going to be a long slog,” he said at a news conference after the speech.
Carney reiterated his point that Canada needed to focus more on fast-growing emerging economies, than on the traditional advanced countries. Companies needed to improve the workers’ skills and take advantage of new technology, and he said shareholders could demand that they return their cash on hand if they are not going to invest the funds.
Additional reporting by Claire Sibonney, Alastair Sharp and Solarina Ho; Writing by David Ljunggren and Randall Palmer; Editing by Janet Guttsman and Steve Orlofsky