In the face of fresh U.S. warnings about the dangers of currency wars, Bank of Canada Governor Stephen Poloz has stressed – again – that he's not trying to deflate the Canadian dollar.
It may be splitting hairs, given the entirely predictable and, frankly, desirable fall in the currency triggered by the bank's recent surprise interest-rate cut. But it's a distinction that matters deeply to the central bank, and its leader.
Speaking to reporters at Tuesday's meeting of G20 finance ministers and central bank governors in Istanbul, Mr. Poloz insisted that the Jan. 21 rate cut, to 0.75 per cent from 1 per cent, was not orchestrated to push down the Canadian dollar in order to support exports as the country wrestles with the oil shock.
"I honestly reject the notion that I'm talking down the dollar," Mr. Poloz said. "I reject the notion that we're being purposeful about that."
His comments came as the United States went on the offensive against countries slashing interest rates to make their exports more price-competitive, which it sees as a threat to U.S. growth as investors pile into the greenback amid the tide of monetary policy cuts in numerous major economies. U.S. Treasury Secretary Jack Lew issued a stern warning at the G20 meeting against using rates to drive currencies down at the expense of the United States, while Washington unveiled legislation that would treat "currency manipulation" as a form of trade subsidy that would face retaliatory U.S. import taxes. It suggested the emerging currency war could escalate into a trade war, which would pose a serious threat to the faltering global recovery.
There's little doubt that currency devaluation was the goal of some of the recent rate cuts. When Australia lowered its key rate last week, central bank Governor Glenn Stevens said that the Australian dollar was overvalued and that "a lower exchange rate is likely to be needed to achieve balanced growth in the economy." Rate cuts in Denmark and Switzerland were explicitly intended to cool their currencies.
Mr. Poloz has been adamant that Canada's cut was all about trying to add monetary stimulus to a slumping economy, and he can certainly make a good case for that, given the deepening impact of the oil shock on what have been some of the biggest sources of Canadian growth. Besides, given that the Canadian dollar's value is so closely correlated with the price of oil (reflecting oil's importance in Canada's exports), the oil plunge was already bringing down the dollar dramatically without the Bank of Canada's help.
Yet he continues to fight an uphill battle to convince markets that he's not seeking a weaker currency – despite making that point repeatedly in his 20 months as governor. In his first prepared speech just days after assuming the job, he made it clear that it's the markets that determine the exchange rate of the dollar, not the central bank.
But that message got muddied over the past year, as Mr. Poloz regularly pointed out the benefits of a lower Canadian dollar for exporters. This fuelled a market perception that the central bank boss favoured a weaker currency, that he was "talking down" the dollar. Mr. Poloz's position was that it was really more an observation than an endorsement. But the distinction was lost on many market participants – so much so that Mr. Poloz felt compelled to dedicate an entire speech, last September in Drummondville, Que., to explain that the central bank not only wasn't using its policy to influence the currency, but felt it was a bad idea to do so.
"Trying to control the loonie is off the table," he said. "Our job is to understand the context, and adjust short-term interest rates to meet our inflation target. That job is tough enough."
Whatever good that speech did may have been considerably compromised by January's rate cut, which blindsided the markets and sent currency traders fleeing. Mr. Poloz is once again trying to shake his soft-dollar image, not only with the public and the markets, but in plain view of his G20 peers.
Regardless of whether Mr. Poloz's rate cut was intended to target the loonie, a hit to the currency was not only what the bank must have anticipated, and was entirely in line with Mr. Poloz's desire to stimulate the economy. With the energy sector sputtering and consumers already stretched thin with high debt, a key hope for the central bank is that the growing non-energy export sector can pick up some of the economic slack. A lower dollar helps non-energy exporters more than any other part of the economy.
So if a lower dollar supports the broader economic purpose of a rate cut, why is Mr. Poloz so determined to distance himself from the currency effect? Because moving the currency is not a job the central bank wants – and he doesn't want to give the markets any reason to think he's taking it on.
The central bank's specific objective is to use interest rates to keep inflation stable near its 2-per-cent target. Mr. Poloz has said that if one starts using interest rates to steer the currency in a certain direction as well, this distorts inflation. The bank can target inflation or it can target the currency, but it can't do both. The bank chooses inflation.
But as long as the market believes the central bank wants to move the currency, it becomes de facto the central bank's job. It's a complication Mr. Poloz neither wants nor needs; as he said, managing inflation is hard enough on its own. Even if his rate cut may have moved the dollar in a helpful direction, he's not going to open a pandora's box by saying so. It's not his job, and for the bank's inflation-focused policy goal to work, it can't be.