The Canadian dollar and the price of oil move "like a pair of train tracks" and trying to stop exchange rates from shifting could hinder the economy's ability to absorb shocks, Bank of Canada Governor Stephen Poloz said on Friday. Poloz, speaking to Reuters in a year-end interview, also gave a cautiously optimistic view on the economy for 2016. He said the underlying trend in the economy was likely quieter than the annualized 2.3 percent growth reported for the third quarter.
After a softer fourth quarter, he said, "We should see some more persistent acceleration as we go through next year." Both Canada's economy and its currency have been hit hard by the crash in the price of oil, as well as low prices for other commodities, with the loonie, as the Canadian dollar is known, plumbing 11-1/2-year lows.
While some in the market believe Poloz prefers a weaker currency in order to help exports take over from housing and consumption as drivers of growth, he said he always tried to speak neutrally about the currency. "It is never my intention to influence the currency through what I say," Poloz said, pointing to the strong correlation between the loonie and oil prices.
"The proof is in the chart ... which is the currency with the oil price. I certainly have no ability to move the price of oil, but the exchange rate has followed it like a pair of train tracks." Flexible exchange rates help an economy digest shocks, and trying to stop a currency from moving means the economy would be slammed by shocks, he said, sitting in a board room at the bank's headquarters, portraits of his eight predecessors hanging from the paneled walls.
The Bank of Canada cut interest rates twice this year to try to offset the shock from cheaper oil. The lower rates, the drop in oil and the first rate hike by the US Federal Reserve in almost a decade have all served to knock the Canadian dollar down nearly 20 percent against the greenback this year. Poloz reiterated there would be monetary policy divergence as the Fed hiked, but declined to say whether this meant Canadian rates might go lower.
"Divergence doesn't mean cutting rates necessarily, it could mean constant rates, it could mean rates going up more slowly, it's just divergence," he said. On Tuesday he said that while some statistics were negative, others were positive and the economic prognosis was more or less in line with the bank's earlier outlook. Canada was in a mild recession in the first half of the year. Although growth resumed in the third quarter, early data has pointed to a weak start to the last quarter of 2015. This is made even more concerning by the recent renewed drop in the price of oil, a major export for Canada.
"The third quarter definitely had a little more to it than we would have expected just because of the child-care benefit checks and a couple of rebound things from the bad weather in Q1, Q2," Poloz said. Asked if he is optimistic about Canada's economic recovery, Poloz said, "Cautiously so."
Poloz also spoke about the debate on whether the 2 percent inflation target should be raised to give the central bank greater room for maneuver. He said the updated view that the bank could take rates as low as minus 0.5 percent if needed "shifts the argument." "It would be a high bar to change it and I think the learning that you can take interest rates lower than we thought before makes the bar higher," he said.
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