April 24, 2014 / 6:49 PM / in 4 years

Bank of Canada sees export recovery, but low inflation if wrong

OTTAWA (Reuters) - The Bank of Canada is more hopeful than before for the recovery of the country’s exports but if exports do worse than expected, overall inflation will fall again and drift further from the target, Governor Stephen Poloz said on Thursday.

Bank of Canada Governor Stephen Poloz speaks during a news conference upon the release of the Monetary Policy Report in Ottawa January 22, 2014. REUTERS/Chris Wattie

A new study by the central bank of Canada’s non-energy exports found that while some sectors had not rebounded in line with foreign demand, other sectors representing about half of total exports should benefit from foreign expansion, he said.

“The bank’s analysis has given us a more granular interpretation of the export picture - and gives us more hope for the recovery of our non-energy export sector,” Poloz said in the prepared text of a speech to a business audience.

Poloz had previously confessed to being puzzled by Canada’s lagging exports and said a recovery of the sector was a prerequisite for full economic comeback.

Higher consumer energy prices should push total inflation up in the next few quarters but this will be transitory and therefore ”the downside risks to inflation remain important, he said. The bank targets 2 percent inflation.

“We already have what looks like a soft landing emerging in housing, so it is crucial that at the same time there is a pickup of momentum in our exports, which we believe will then be followed by a pickup in business investment,” Poloz outlined.

“However, if, for some reason, the export recovery were less than we’re predicting, then total inflation, having gone up to target, will simply drift back down to converge with core inflation at perhaps around 1 percent, because the output gap will be just as big as before.”

The bank’s analysis of 31 non-energy export sectors found that the recent depreciation of the Canadian dollar would help some industries, but that the majority of sectors that had been doing well - and which the bank says should drive the export recovery - are less likely to benefit from the lower currency.

Writing by Randall Palmer; editing by Louise Egan

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