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Carney Rejects 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 a speech today near Calgary, home to energy companies like Suncor Energy Inc. and Encana Corp.

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 about 60 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.”

Dutch Disease

The phrase Dutch Disease, which Carney said was first used by The Economist in 1977, 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.

Canada’s dollar rose to a one-year high today, appreciating 0.5 percent to 97.81 cents per U.S. dollar at 2:07 p.m. in Toronto. It touched 97.66, matching the strongest since Sept. 2, 2011. One Canadian dollar buys $1.0224.

The decline of domestic manufacturing is linked to global forces, Carney said, adding that other industrialized countries have experienced factory job and output losses. The U.S. dollar’s weakness against a range of other currencies explains about 40 percent of the Canadian dollar’s rise over the last decade, Carney said, while higher commodity prices explain about half of the appreciation.

Sharing Wealth

The wealth generated by the energy industry, which is concentrated in western Canada, could be better shared if there were new infrastructure, including refineries and pipelines to bring oil east, Carney said. Eastern manufacturers should also seek to increase sales to the energy industry and Canada should boost its access to faster-growing emerging markets, Carney said. Prime Minister Stephen Harper touted trade with Asia in an interview yesterday with Bloomberg News in Vancouver.

Harper’s Conservative Party government could curb the currency’s strength by making companies pay for the cost of their pollution, George Smith, spokesman for NDP Leader Thomas Mulcair, said in an e-mailed statement. “New Democrats have always believed that our natural resources are a tremendous blessing, and that they have to be developed in a responsible, sustainable way” he said in the statement.

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.”

Employment Rose

Statistics Canada reported today that employment rose by 34,300 in August following a decrease of 30,400 in July, keeping the unemployment rate at 7.3 percent.

“Nobody is fully satisfied,” with the job market, Carney said at a press conference after the speech. “There are still a lot more Canadians who want to work who aren’t working.”

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.

Widening Gap

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.

“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.”

Preliminary Talks

Carney this weekend is heading to Europe for talks that include whether to modify or replace the London interbank offered rate, known as Libor. Those talks are “preliminary” and are unlikely to generate any final decisions, said Carney, who is also chairman of the Financial Stability Board, charged with writing new global rules to avoid another financial crisis.

Carney also reiterated that some companies are being too cautious in holding large amounts of cash on their balance sheets. On Aug. 22, he referred to such funds as “dead money” that could be returned to shareholders.

“I stand by every single word that I said” about cash stockpiles, Carney said at today’s press conference. “The facts are the facts -- there is a lot of cash and there is a lot of work to be done.”

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