Bank of Canada sees bigger risks to outlook
Updated: 2007-11-07 10:28
NEW YORK -- The risks to Canada's economy have grown since the Bank of Canada laid out its projections in an October 18 report, Senior Deputy Governor Paul Jenkins said on Tuesday.
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"Given recent information, both the upside and downside risks appear to be greater than they were when we completed the report," Jenkins said in a speech in New York, referring to the bank's most recent Monetary Policy Report.
The main risk that could push both inflation and output lower was a persistently higher-than-expected Canadian dollar. On the other hand, excess demand in the Canadian economy could last longer than expected and fuel inflation.
On the rising Canadian dollar, which hit a fresh modern-day high on Tuesday, Jenkins said: "Given the magnitude of the appreciation we've seen ... recent moves are outside normal bounds" even with broad weakness in the US dollar.
If the Canadian dollar were persistently higher, "it would have significant risks to the Canadian economy both to output and inflation," he said at a question-and-answer session after the speech to the Canadian Association of New York.
He also reiterated the bank's line from the report, saying the "magnitude and speed of the recent appreciation has been stronger than historical experience would suggest."
The Canadian dollar shot past parity with the US dollar on September 20 and has not backed down since. By Tuesday afternoon, it was at its highest point of the day at US$1.0848, or 92.18 Canadian cents on the weak US dollar and surging commodities prices.
Asked whether Canada would consider intervening in exchange rate markets, Jenkins only said that research showed currency intervention would need to be followed up by policy action to have a lasting impact.
"All the evidence I'm aware of currency intervention suggest that ... for it to have any lasting effect, it requires a policy follow-up," he said.
Jenkins also said more flexible exchange rates were needed for an orderly unwinding of global imbalances.
"Do I feel a need for more exchange rate flexibility in the international monetary system? The answer is yes."
Jenkins emphasized in his speech that the economies of Canada and the United States have responded differently to global economic shocks because they are structured differently. That has implications for monetary policy on both sides of the border, he suggested.
"For an economy as open as Canada's, having a flexible exchange rate is a critical element in allowing it to pursue an independent monetary policy that is appropriate to its specific domestic circumstances," he said.
The Bank of Canada raised rates to 4.5 percent in July. The next rate announcement is set for December 4 and most market players expect no change in policy, according to a Reuters poll on Friday.
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