Canada's recovery remains on track, although the economy has been slower to take off than the central bank anticipated, Bank of Canada Governor Mark Carney said Thursday.
In October, the Bank of Canada predicted gross domestic product would grow at an annual rate of two per cent in the July-September period, ending three consecutive quarters of contraction. But some data released since have proved disappointing, including a Statistics Canada report that showed the economy contracted 0.1 per cent in August after posting no growth in July.
“Recent indicators suggest somewhat softer growth relative to that two per cent projection,” Mr. Carney said at a news conference in New York that the central bank broadcast on its website. “The expectation is that the overall profile of the projection, so accelerating growth into [the fourth quarter] and into 2010, for Canada, remains valid.”
The Bank of Canada's current projection for growth in the final three months of 2009 is an annual rate of 3.3 per cent.
The biggest headwind impeding Canada's rebound is the strength of the currency, which the central bank says will more than fully offset positive factors in the economy, such as stronger consumer confidence.
Mr. Carney, who spoke to reporters after giving a speech to the Foreign Policy Association, reiterated that the central bank will adjust its policy stance if evidence shows the currency takes an even a greater toll on growth, and in so doing, knocks the central bank off track in its effort to get inflation back to its target of two per cent.
“We look at the currency in context of our inflation target, so the level of the dollar, the volatility around the dollar, persistence of strength or weakness of the dollar, is one factor the influence output and inflation in Canada,” Mr. Carney said. “We have to look at that in conjunction with all other factors and set monetary policy appropriately. We have a wide range of options of how to set monetary policy and we use those as necessary, and only to the extent necessary, to achieve that target.”
In October, Mr. Carney said the loonie's ascent had dampened growth so much that it will take until the third quarter of 2011 to coax inflation back to two per cent. That's a quarter longer than the central bank had previously projected, indicating policy makers will leave the benchmark borrowing rate at 0.25 per cent longer than they would have otherwise.
Meanwhile, Mr. Carney weighed into the debate over the future of the U.S. dollar, saying the legal tender of the world's largest economy will remain the world's reserve currency for quite some time yet.
In his nuanced speech to the Foreign Policy Association, Mr. Carney said gold represents too small a share of the world's money supply, and any discussion of the yuan as an international means of exchange is “moot” until the Chinese government opens its capital markets and allows its currency to be circulated in international markets.
“Over the longer term, it is possible to envision a system with other reserve currencies in addition to the U.S. dollar,” Mr. Carney said in the text of his remarks, advance copies of which were given to reporters in Ottawa. “However, with few alternatives ready to assume a reserve role, the U.S. dollar can be expected to remain the principal reserve currency for the foreseeable future.”
The speech, in front of an audience largely of Wall Street analysts, academics dedicated to foreign policy and New York-based representatives of international finance ministries, amounts to a preview of the role Mr. Carney and Finance Minister Jim Flaherty are set to assume as they host counterparts from the Group of Seven and Group of 20 next year – that of honest broker.
With the dollar 15 per cent lower this year, investors and policy makers are increasingly speculating that the greenback's role as the central means of global exchange is at an end. That's contributing to tensions within the ranks of the G20. Some, including Australian Prime Minister Kevin Rudd, say such talk is actually exacerbating the U.S. dollar's decline, which is exacerbating already volatile currency markets.
Mr. Carney said at the outset of his speech that his goal was to “help focus the current debate.”
Canada's central bank chief sought a careful diplomatic path by acknowledging that the U.S. government isn't preordained to retain the world's reserve currency, while making clear that China and other countries that insisted on maintained fixed exchange rates were delaying the economic recovery by refusing to accept their share of the U.S. dollar's adjustment.
“All countries should accept their responsibilities for promoting an open, flexible, and resilient international monetary system,” Mr. Carney said. “Responsibility means recognizing spillover effects between economies and financial systems and working to mitigate those that could amplify adverse dynamics.”
