The Bank of Canada has moved to quash suggestions that it wants a lower Canadian dollar and that it helped orchestrate the loonie’s recent fall.
Senior deputy governor Tiff Macklem insisted Friday that the central bank targets inflation, not the value of the currency.
“The exchange rate is determined in markets, and we neither promote any specific value for the Canadian dollar, nor thwart its movements,” said Mr. Macklem, making his last scheduled speech before taking up a new job as head of the University of Toronto’s Rotman business school in July.
The Canadian dollar, trading at roughly 90 cents (U.S.), has fallen 10 per cent in the past year, a decline that has accelerated in the past month.
Several economists have suggested Bank of Canada Governor Stephen Poloz, who took over from Mark Carney last June, has been talking down the dollar by playing up disinflation fears and dropping the bank’s rate-hike bias in October.
A lower dollar is particularly good for hard-hit Canadian manufacturers and other exporters, giving them more cash for their foreign sales.
But in remarks prepared for a speech at Concordia University in Montreal, Mr. Macklem said Canada’s freely floating exchange rate is a vital “shock absorber” that allows the economy to adjust to shifts in global forces.
The floating dollar is a key part of the bank’s 2 per cent inflation-targeting regime, allowing it to pursue a “made-in-Canada” monetary policy, he said.
Mr. Macklem then went on to explain the reasons why inflation has remained stubbornly below the bank’s prices target. In recent months, prices have been rising at barely a 1 per cent annual rate.
And he reiterated Mr. Poloz’s recent warning that inflation is likely to remain below target for another two years.
He said the low-price pattern is a combination of both “good” disinflation and “bad” disinflation, and that makes the central bank’s job more difficult.
The Bank of Canada’s challenge is to use monetary policy to counter the bad, but “look through good disinflation.”
The “good” disinflation, according to Mr. Macklem, includes heightened competition between stores and better retail productivity in Canada, particularly in groceries – the result of aggressive discounting by Wal-Mart and others, increased cross-border shopping and the rise of online shopping.
He pointed out that food, which makes up 17 per cent of the consumer price index, was the single largest “drag” on core inflation in 2013.
And he said structural changes in the retail industry suggests that “competitive pressures are likely to remain intense for some time.”
But Mr. Macklem suggested that the falling dollar would counter some of that pressure as imported food becomes more expensive.
The “bad” forces of disinflation come from slack in the Canadian economy and weak demand in the global economy, he said.