Bank of Canada boss Stephen Poloz is never going to say that he's engineering the Canadian dollar downward. But he's not denying that a weaker loonie will help him address some of his priorities – and it's clear that his words and actions are helping the currency get there.
"Our job is to focus on inflation," he said in Wednesday's press conference following the release of the Bank of Canada's latest policy-setting statement and quarterly monetary policy report (MPR), which expressed deepening concern about Canada's disinflationary trend and hinted that an interest-rate cut was not out of the question. "The exchange rate is one of those residual items that happens to move in this complex mechanism that's, really, the market."
His response was no surprise. It's been years since the Bank of Canada was in the business of actively influencing the Canadian dollar's exchange rate. Since 1991, the bank's guide for monetary policy – by law – is to steer the inflation rate toward a specific target (which, since 1995, has been 2 per cent). It shut down its currency intervention program in 1998. Officially, inflation control is the bank's sole policy goal.
Still, the Bank of Canada's increasingly dovish tone in its economic assessment and interest rate outlook is feeding directly, and quickly, into the currency's fall. The dollar has dropped nearly 8 per cent against its U.S. counterpart in the past four months. It lost nearly a full cent Wednesday in the wake of the Bank of Canada's comments – threatening to dip below 90 cents (U.S.) for the first time since mid-2009.
And there's no denying – even by Mr. Poloz – that a lower dollar is a very useful "residual" effect of the central bank's current policy leanings. It may not be directly intended, but it's neither unexpected nor unwelcome.
Mr. Poloz has consistently said that to reinflate the Canadian economy, we need a recovery in exports and a resurgence in business investment. And, he acknowledged, the Canadian dollar has been an impediment. Indeed, he even referred to the currency's strength throughout the recession and sluggish recovery – a time when the country's lack of economic strength would have typically sent the dollar lower – as an economic "shock" that the country has yet to overcome. Specifically, non-commodity exporters – who haven't had the benefit of the generally strong commodity prices that were at the root of the dollar's persistent strength – have had a currency albatross around their necks.
In the press conference, Mr. Poloz quite candidly acknowledged that the weakening of the dollar is "beneficial" to exporters who have struggled in the strong-currency environment. He stressed that a weaker currency is no cure-all for Canada's export woes, but it will help.
"The increase in U.S. demand is the most important thing; that's the cake," he said. "If the exchange rate is going down a little and gives us that little bit of a marginal boost, there's your icing on the cake."
But let's connect the economic dots, with Mr. Poloz's help. He said the weaker dollar would help boost exports, which in turn would improve business confidence here in Canada, leading to increased business investment. Which is what he believes is necessary to accelerate the economy and lift the inflation rate back to the 2-per-cent target.
Of course, there's a more direct route. A weaker currency increases the price, in Canadian-dollar terms, of imported goods. The dollar's depreciation provides a timely counterweight to the country's disinflation problem.
None of which is to say that a dollar depreciation is Stephen Poloz's intent. The bank is giving a frank assessment of a struggling economy with stubbornly weak growth, and an inflation rate that has drifted too low for too long. The market reads that as evidence that the bank has moved further away from interest-rate increases, and that weakens the attractiveness of the Canadian dollar.
Still, Mr. Poloz is keenly aware that the Bank of Canada's choice of words are hurting the dollar. That might not be his end goal. But I'm sure he's just fine with this side effect.
Editor's note: An earlier version of this story said the Bank of Canada has not actively influenced the Canadian dollar's exchange rate in decades. In fact, the central bank ended its dollar-intervention program in 1998, and it has not intervened since. Current policy is that the central bank may only intervene in exceptional circumstances, on the direction of the federal government.
David Parkinson