Bank of Canada To Focus on Monetary Policy Not Currency Rate

- Global economy has only partially recovered
- Loonie is still 40% higher than in the early 2000s
- Bank of Canada will not manipulate the currency exchange rate

The Bank of Canada Governor Stephen Poloz addressed a crowd of entrepreneurs earlier today. While at times the governor seemed to be giving a Central Banking 101 lecture he stressed the importance of a floating currency in the current adverse economic atmosphere. He also came across as a firm believer in avoiding the pitfalls that have befallen the policy makers that have relied heavily in forward guidance. In start contrast to his predecessor Mark Carney, now governor of the Bank of England, Poloz is not an “unreliable boyfriend”. Carney was called that by one of UK’s MPs after contradictory statements in the same week that had markets confused about the interest rate outlook of the nation. Poloz outlined the Canadian reality of an economy dependant on exports mainly to the US. A Recovery in the US will benefit its norther neighbor.

Bank of Canada Governor Stephen Poloz main points:

• Global economy has only partially recovered
• Loonie is still 40% higher than in the early 2000s
• Bank of Canada will not manipulate the currency exchange rate
• A floating loonie is the best strategy to achieve monetary policy objectives
• Canada’s economy is linked to commodity prices
• An export focus is needed to get Canada back on track

The Bank of Canada Governor Stephen Poloz reiterated the central bank’s mandate. To achieve its mandate the BoC needs to be focused on inflation.

The Governor’s what if scenario on cutting rates to keep the loonie at 65 cents in is a good educational tool but it is afforded the luxury of knowing the outcome of the 2008 crisis.

The data earlier today supports Governor Poloz speech to entrepreneurs. Canadian manufacturing exceeds expectations. Auto manufacturing leads the way with 11.6% MoM increase. Factory shipments rose 2.5% with auto again being a strong contributor to the surge. Both figures were well above expectations and tied into the BoC Governor’s speech.

The Governor is focusing on the positives of a weak loonie but outlines the challenges of central bank intervention as they could wreak havoc with inflation and ultimately job creation.

The main challenge facing Canada is its reliance on commodities and manufacturing. The first have decreased in price given the current global growth forecasts and only energy seems to have contributed to Canadian growth. Manufacturing surprised to the upside with auto being the major driver. After the harsh winter it will remain to be seen if the pace of recovery is sustainable but a lot depends on the US market.