Canadians should get used to lower dollar: Bank of Canada governor

The Bank of Canada won’t try to match recent interest rate increases in the U.S., but will “continue to run an independent monetary policy, anchored by our inflation target of two per cent,” even if that means having a lower Canadian dollar, bank governor Stephen Poloz said Monday.

Canada twice cut its benchmark interest rate in 2015 in an attempt to stimulate its sputtering economy, which was hit hard by the falling oil prices. The U.S. – a net importer of oil meanwhile has benefited from falling energy prices – and finally hiked its rate in December after seven years at record lows.

In fact, the dominant theme across the global economy has become “divergence,” Poloz said in a speech at the Mayor’s Breakfast Series in Ottawa.

“At one end of the spectrum, the U.S. Federal Reserve has just started its interest rate normalization process after seven years of keeping its policy rate near zero,” Poloz said. “At the other end, the European Central Bank (ECB) recently cut its deposit rate to negative 0.3 per cent.”

Resource exporting economies hit hard

The sharp decline in energy and other resource prices is an important force affecting virtually every economy over the past year, Poloz said.

Resource-producing countries, such as Canada, Australia and Mexico, have seen their currencies depreciate against countries that are net consumers of resources, such as the United States.

“It is not a coincidence that the Canadian dollar is about where it was back in 2003 and 2004,” Poloz said. “Oil prices are also about where they were back then.”

For Canada the fall in oil and other commodity prices represents a loss of more than $50 billion in national income, or about $1,500 for every Canadian, Poloz said.

‘Shift in economy’s growth engine’

But it’s not all bad news, he said.

The depreciation of the loonie also offsets a part of the drop in commodity prices, which are usually priced in U.S. dollars.

“In other words, Canadian-dollar revenues for commodity exporters fall by less than U.S. dollar revenues,” Poloz said.

“Second, the depreciating dollar boosts Canadian-dollar revenues for exporters of other goods, which are also often priced in U.S. dollars. This then allows those companies to compete more effectively for future export sales.”

Those increased exports will eventually mean more growth and rising investment in the non-resource sectors of the economy, and more employment.

“In other words, the exchange rate decline helps to facilitate a shift in the economy’s growth engine from the commodity sector to the non-commodity sectors,” Poloz said.

Canada has already seen stronger growth in exports of non-commodity goods such as machinery and equipment, furniture, pharmaceuticals, aerospace and electronics, he said.