OTTAWA (Reuters) - The Canadian dollar did not weaken significantly after the Bank of Canada abandoned 18 months of warning about higher interest rates last week in response to low inflation and a weak economy, central bank head Stephen Poloz said on Tuesday.
Poloz told a parliamentary committee that in setting interest rates last week the bank heightened its focus on the fact that inflation has been persistently below its 2 percent target.
“In that context we decided that we should no longer have an explicit bias toward higher interest rates,” he said. “In that context it’s true that markets have digested that and have sold the Canadian dollar a little, but it’s not a very significant change.”
Canada’s central bank was the first to tighten monetary policy following the 2008-09 global financial crisis, raising its key overnight rate three times in mid-2010 and holding the rate at 1.0 percent since then.
The central bank held the rate unchanged last week, but surprised markets by signaling its next move could just as well be a rate cut as a hike, effectively ending the mildly hawkish stance it had held since April 2012 and nudging the Canadian dollar to a one-week low.
Poloz said he saw little risk of the bank overshooting its inflation target due to easy monetary policy. Canadian consumer prices rose 1.1 percent in September and the bank only expects inflation to climb back to 2 percent by the end of 2015.
Canada’s primary securities dealers surveyed by Reuters after the bank’s rate decision forecast the bank would not raise rates until the second quarter of 2015, six months later than they predicted previously.
The Bank of Canada has repeatedly expressed disappointment that exports - a central plank of the Canadian economy - have not bounced back as quickly as the bank’s models had predicted.
Senior Deputy Governor Tiff Macklem blamed the delayed recovery on an atypical U.S. recovery and the loss of companies in the recession, with a stronger Canadian dollar compounding the problems.
“The biggest reason exports have been weak is that the U.S. economy, our major export market, has had the deepest recession and the slowest recovery since the Great Depression. So that by itself sets a weak track for an export recovery,” said Macklem, who appeared before lawmakers alongside Poloz.
Macklem said the strength of the Canadian dollar versus the U.S. dollar is only part of the reason for the lagging exports.
“There are competitiveness factors, the (Canadian) dollar is part of that. We estimate it’s about two-thirds of that and one-third is the weak productivity performance we’ve had over the last decade,” he said.
Poloz emphasized that many exporting companies simply vanished in the 2008-09 recession. Now, he said, that trend is starting to reverse itself.
“The good news is we’ve seen a sudden increase in the population of companies in 2013, which is very encouraging,” Poloz said. “It’s the first evidence that we’ve seen since 2008 of what I would call natural growth, which is the growth process that is self-generating, self-sustaining.”
(Corrects headline and first paragraph. The Bank of Canada said Poloz was referring to the change in the Canadian dollar, not in monetary policy when he spoke of “not a very significant change.”)
Reporting by Louise Egan; Editing by Peter Galloway and Janet Guttsman