Bank of Canada Governor Stephen Poloz said the fall in the nation’s dollar is easing the shock of lower oil prices, and a diverse economy allows for a shift to other growth opportunities, such as Asian demand for seafood.
“We can’t do much about resource price shocks,” Poloz said in a speech Monday in Calgary. “But our policy can help the economy adjust to them. In particular, our floating exchange rate helps absorb some of the impact of the price movements and sends signals that facilitate adjustments.”
Canada’s dollar reached the weakest since 2004 last month against its U.S. counterpart as crude oil prices fell below $40 a barrel and investors braced for the chance of a rate increase from the U.S. Federal Reserve.
Poloz kept the central bank’s trend-setting overnight lending rate at 0.5 percent at the last decision on Sept. 9, after cutting it in January and July. Toronto-Dominion Bank predicted Monday the bank will leave the rate unchanged until the third quarter of 2017.
The speech indicates that Poloz “would be open for further Canadian dollar weakness should the economy slow further,” Thomas Costerg, a New York-based economist at Standard Chartered Bank, said by e-mail. The policy rate will be “on hold for a prolonged period,” he said.
Poloz didn’t comment on interest rates or the strength of the second-half recovery in his speech, which comes in the middle of a campaign before the Oct. 19 federal election. The next interest-rate decision is two days after the vote.
Executives should be ready to react to commodity-price signals and take advantage of opportunities, Poloz said. “Policy makers can help in these efforts by encouraging economic flexibility. This means allowing the necessary adjustments to take place and not frustrating flows of investment or labor from one region to another,” the governor said.
Falling prices for crude oil and other commodities led companies to cancel investments and lay off employees, and the national economy shrank in the first and second quarters of this year as a result.
Oil executives who told the Bank of Canada they’re cutting investments by 40 percent this year are still revising their long-term price forecasts, the governor said.
The rush of investment in commodity production before the crash in prices wasn’t an error, and Canada has a long history of dealing with such swings, Poloz said.
“Without those investments, we would never have been able to capitalize on the higher prices, which boosted Canada’s aggregate income,” he said.
The urbanization of China and India suggests that other commodity producers in Canada can tap into rising demand, Poloz said. He cited recent weekly shipments of 60,000 lobsters from Canada’s east coast to Shanghai as an example.
“I’m actually quite optimistic about China and what it means for us” in Canada, Poloz said in response to an audience question after his speech. He also told the audience he rejects the idea Canada is too reliant on resources and “you have to believe it’s better to have this stuff.”
The lower Canadian dollar has helped limit the fall in the inflation rate below the bank’s 2 percent target by boosting prices for imported goods, Poloz said. He reiterated his July view that the “underlying trend” in inflation is on a pace of between 1.5 percent and 1.7 percent.
The central bank will “look through” the temporary pressures on inflation from the drop in energy prices and the pass-through of a weaker currency to import prices, he said.
“The floating currency is helping to reduce the disinflationary risks that have come with the cut in our national income,” Poloz said.