Thursday, September 17, 2009

Bank Of Canada: Strong Canadian Dollar may Reduce Economic Growth

With predictions abound of economic recovery in the third quarter of this year, the Bank of Canada has issued a warning – not its first – that the strong Canadian dollar may pose a serious threat to the nation's financial comeback.

The Deputy Governor of the Bank of Canada, Timothy Lane, recently addressed economists at a meeting of the Canadian Association of Business Economists. Mr. Lane's speech did not veer much from the official viewpoint of the country's central bank. He warned that a strong Canadian dollar will reduce economic growth and will delay the return of inflation to its target. In fact, as the bank has made certain projection in regards to inflation, Mr. Lane feared that the continuing strength of Canada's currency may force a revision of those predictions.

Mr. Lane explained that the Bank of Canada has tools at its disposal to deal with the rise in the dollar's strength. However, the Bank's options are limited, with interest rates at an historic low of 0.25 percent. At this point, the most the Bank can do is issue verbal warnings to speculators to try and steer them away from the Canadian dollar. Most economists agree that Bank intervention in foreign exchange markets is highly unlikely. Another step the Bank could do, and is highly unlikely, is quantitative easing – literally, the printing of money. Mr. Lane did not give any indications, though, that the Bank is considering this unconventional step.

One of the leading factors of the currency's rise in value is attributed to higher commodity prices, in turn leading to a Canadian recovery. Similarly, the weakening of the U.S. dollar is a contributing factor.

While Mr. Lane views global financial recovery as moving forward, and Canadian recovery as one of the leaders, he remains cautious about committing to a complete recovery in the third quarter.

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