Mark Carney, a senior official in the Finance Department and a former investment banker, will succeed David Dodge as the next governor of the Bank of Canada.
"We believe a worthy successor has been found," Finance Minister Jim Flaherty said, in a news conference announcing the next appointment. "He is eminently qualified to lead the Bank of Canada."
(In Pictures: The David Dodge years)
In naming Mr. Carney, the Finance Minister loses a top, trusted adviser who has made his name in Ottawa for spearheading the budget, bringing out the taxation policy for income trusts, and most recently, encouraging financial institutions to work out a standstill in the short-term credit market.
"It is both an honour and a privilege to be named governor of the bank of Canada," Mr. Carney said at a news conference.
Mr. Dodge, who was also at the news conference, extended his congratulations as well.
Mr. Carney leap-frogs over the perceived leading contender to succeed Mr. Dodge: senior deputy bank governor Paul Jenkins.
Traditionally, the central bank has chosen insiders for its governors. It broke with tradition when the bank and the government chose Mr. Dodge seven years ago.
Mr. Dodge's appointment ruffled some feathers inside the bank, and Mr. Carney's appointment is likely to do the same.
"We were trying to raise the bar," said Jean-Guy Desjardins, the bank board member who headed the search committee to replace Mr. Dodge.
Mr. Desjardins said that Mr. Jenkins was "definitely a very, very serious candidate," but the board agreed unanimously that Mr. Carney was the best man for the job.
"Given the challenges the bank will have to face in terms of financial markets and integration and globalization, that Mr. Carney was the best equipped candidate," Mr. Desjardins said.
At the news conference, Mr. Carney expressed his support for the 2 per cent inflation target that has guided monetary policy for much of the past two decades.
Mr. Carney also said as governor, he would pay attention to the pain of the manufacturing sector and regional disparities, but would set monetary policy for the Canadian economy as a whole. Mr. Dodge has held the same stand, saying he prefers to focus on national figures for growth and inflation, since that's all he can influence with his monetary policy.
As for the credit crunch, Mr. Carney was upbeat.
"Progress is being made at all levels…but these processes will take time," he said. "The process is not over."
Mr. Carney, who begins his seven-year term Feb. 1, takes over after a long period of monetary policy stability and economic prosperity.
The outgoing governor, Mr. Dodge, was able to maintain the annual inflation rate very close to his 2 per cent target throughout his seven year term.
At the same time, Canada avoided recession, and growth remained on an even keel, despite a recession in the United States in 2001, despite a rapid appreciation of the Canadian dollar, and despite oil prices that have shot sky-high.
Mr. Dodge gets full marks for making sure the Canadian economy operated smoothly, said David Wolf, chief economist at Merrill Lynch (Canada).
"He's paid to, first and foremost, keep inflation under control," Mr. Wolf said. "And that is what he's done."
While Mr. Dodge hands over a situation that is relatively under control, some significant challenges await the next governor.
Inflation has been low around the world for the past few years mainly because of cheap imports and stiff competition from China and emerging Asia. Increasingly, as China's markets mature and inflation creeps into its prices, Asian goods won't be as cheap. Canada and other industrialized countries won't be able to count on China as much, to keep inflation under control, economists say.
Plus, Mr. Dodge has launched a thorough review of how the central bank should handle inflation - a review that will have to be completed by his successor, and could well lead to a whole new inflation-fighting regime.
And the new governor will also have to wrestle with how to handle the Canadian dollar, which is at a 30-year high and is hurting exports and manufacturers, while spurring consumption.
The Bank of Canada is also grappling with an ongoing credit crunch that has gripped international debt markets, and forced repeated interventions by the Canadian central bank.
The credit crunch has also thrown the Bank of Canada's plans to increase interest rates off-track. The bank began hiking tentatively in July, but then had to put its key rate on hold in September so it could gauge the effects of the credit crunch.
It's still not clear how much of an effect the credit turmoil will have, and the future governor will have to take a fresh look at how to evaluate that, and treat credit and asset values in the future.