HALIFAX (Reuters) - Structural weaknesses are weighing heavily on Canada’s export sector but an improved mix of fiscal and monetary policy has taken some pressure off the central bank to stimulate demand, a senior Bank of Canada official said on Tuesday.
Bank of Canada Deputy Governor Lawrence Schembri also said Governor Stephen Poloz believes the central bank still has unconventional tools left it can use to stimulate demand, but that the mix of fiscal and monetary policy in Canada is moving in a better direction.
“Achieving that better balance is really important for us because it relieves some of the pressure on the central bank to boost aggregate demand and reach our inflation target,” Schembri told an economic policy think tank audience in Halifax.
The federal Liberal government said last week the budget deficit would reach C$25.1 billion ($18.8 billion) in the 2016-2017 fiscal year as it pours money into infrastructure spending in a bid to revitalize a limping economy, investment Poloz has supported.
The Bank of Canada cut interest rates twice in 2015 and has since held borrowing costs near historic lows, forced to repeatedly cut its outlook for exports and economic growth.
Analysts are divided over whether the bank’s next move will be a rate cut or a rate hike, even with the U.S. Federal Reserve expected to increase rates as early as December.
In a speech highlighting how the bank overestimated Canada’s export recovery, Schembri said there is good reason to believe exports should strengthen as the U.S. and global economies gain momentum.
He said that while a weaker Canadian dollar has helped exports in the past, other currencies have weakened more, hampering Canadian competitiveness. Furthermore, the central bank expects the currency to stay in its current range.
“(The Canadian dollar) has been in the 75 cent range for the better part of this year so I think if commodity prices remain relatively stable, so will the Canadian dollar at the current level,” he said during a question and answer session after his speech.
Schembri said Canada’s structural export capacity and competitiveness challenges have been more persistent and pronounced than the bank expected, and noted that a good part of Canada’s slow export recovery is due to weakness in U.S. business and residential investment.
The U.S. is Canada’s largest trading partner, taking about 75 percent of its exports.
($1 = 1.3331 Canadian dollars)
Additional reporting by Andrea Hopkins and Leah Schnurr in Ottawa; Editing by Meredith Mazzilli