High loonie on the radar as Bank of Canada sees ‘choppy’ recovery from pandemic
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Even though the shock-and-awe campaign that Wilkins helped orchestrate has subsided, policy-makers continue to deploy historic levels of stimulus. The Bank of Canada reiterated that it would continue to buy Government of Canada bonds at a rate of about $4 billion per week to keep downward pressure on interest rates, and it restated that it would keep the benchmark lending rate pinned near zero until sometime in 2023.
Ultimately, Bank of Canada leaders care most about hitting their inflation target of two per cent. They noted that the inflation measures they follow to get a read on where prices are headed are all below two per cent, and that “considerable” economic slack is “expected to continue to weigh on inflation for some time.”
Canada’s dollar has climbed to about 78 cents U.S. from around 76 cents at the end of October, when the central bank last reviewed its policies. The currency was a subject of consideration during those meetings, earning a mention in the Oct. 28statement, and would have been one of the factors that went into the central bank’s decision to add monetary stimulus by making an “extraordinary” promise to leave the benchmark rate near zero for more than two years.
The exchange rate also weighs on the central bank’s inflation calculations, as it has implications for the cost of imported goods and services. In the current context, a stronger currency could act as another downward force on prices, adding to the challenge of getting overall price increases back to two per cent.
“The way I read the comment from the Bank of Canada is that there is nothing they can do for the dollar strength, because it is broad-based U.S. dollar depreciation,” said Charles St-Arnaud, chief economist at Alberta Central. “With lower imported goods prices, we could see that contribution decline in the coming months, pushing inflation lower, maybe even negating some of the domestic pressures.”
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