Carney Rejects Idea High Canada Dollar Causing `Dutch Disease'

Bank of Canada Governor Mark Carney rejected the idea the central bank has hurt domestic manufacturers by allowing a commodity boom to drive up the country’s dollar, calling it a “caricature” that would limit the beneficial development of the Alberta oil sands.

The prices of crude oil, Canada’s largest commodity export, and other primary materials have been boosted over the past decade by emerging-market demand that will continue for years, Carney, 47, said in the text of a speech he’s giving today near Calgary, the center of the country’s energy industry. He will hold a press conference after the speech.

The country’s main opposition New Democratic Party has said Canada should take steps to counter “Dutch Disease,” which was the title of Carney’s speech today. Canada’s dollar has strengthened 59 percent against the U.S. dollar over the last decade and the central bank’s index of commodity prices has more than doubled, while manufacturing employment has fallen to 1.8 million from 2.3 million, or by 22 percent.

“The logic of Dutch Disease requires that we undo our successes in order to depreciate our currency,” Carney said. “Taken to its natural conclusion, this logic dictates that we shut down the oil sands, abandon our resource wealth, have high and variable inflation, run large fiscal deficits and diminish our financial sector.”

The phrase Dutch Disease refers to the Netherlands’s uneven economy after natural gas deposits were discovered in the North Sea. The resulting rise in the country’s currency was blamed for the demise of Dutch manufacturing.

Global Forces

The decline of domestic manufacturing is linked to global forces, Carney said. Other industrialized countries have experienced factory job and output losses, while higher commodity prices explain about half of the appreciation of the Canadian dollar, he said.

Canada hasn’t done transactions in the currency market to influence the country’s exchange rate since 1998, a period that includes moves to a record low and a record high. The central bank’s policy restricts intervention to cases where foreign exchange markets break down or when currency movements “seriously threatened” long-term economic growth, according to its website.

“The Bank does take the exchange rate into account in setting policy,” Carney said. “The persistent strength of the Canadian dollar has been one of the reasons why monetary policy has been exceptionally accommodative for so long.”

Weakening ‘Futile’

The central bank’s mandate is to meet a 2 percent inflation target, Carney said, and weakening the currency would be “futile,” Carney said.

“The outcome could be even worse if the Bank cannot quickly re-establish its credibility after betraying earlier commitments to Canadians,” he said, referring to inflation.

The Bank of Canada’s key interest rate has been 1 percent for two years, the longest pause since the 1950s. Monetary policy remains tighter than in the U.S., where the benchmark rate is in a range of 0 to 0.25 percent and Federal Reserve Chairman Ben S. Bernanke is buying assets to boost growth.

Carney may also widen the gap between Canada’s monetary policy and the rest of the Group of Seven nations, with a rate announcement this week reiterating that tighter policy “may become appropriate” as the economy moves toward full output.

European Central Bank President Mario Draghi said yesterday policy makers agreed to a program of unlimited bond- purchases to regain control of interest rates in the euro area and fight speculation of a currency breakup. The ECB also held its benchmark rate at a record low of 0.75 percent.

ECB Announcement

“The Bank very much welcomes yesterday’s announcement by the European Central Bank of significant new measures to address convertibility risk and improve the transmission of monetary policy,” Carney said.

“However, it will take some time to restore market confidence, and it will take years for fiscal and structural adjustments to work,” he said. “Moreover, the discussions over the federal institutions that may be ultimately required to support a durable monetary union are still in their infancy.”

To contact the reporter on this story: Greg Quinn in Ottawa at; Jeremy van Loon in Calgary at;

To contact the editors responsible for this story: David Scanlan at; Christopher Wellisz at

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