The sharp decline in Canada’s dollar is helping to protect the country in the midst of falling oil prices that have lowered the national income the past year, according to the head of the Bank of Canada (BoC).
“We can’t do much about resource price shocks. But our policy can help the economy adjust to them,” Stephen Poloz said during a speech in Calgary Monday (September 21).
“In particular, our floating exchange rate helps absorb some of the impact of the price movements and sends signals that facilitate adjustments.”
The BoC has twice lowered its benchmark interest rate since the beginning of the year as a precautionary measure in the wake of plummeting oil prices.
This has sent the Canadian dollar plummeting from US$0.92 a year ago to US$0.75 today.
Poloz said the national bank’s inflation-targeting tactic has protected the country from further hardships as a drop in oil prices rattled the economy, especially in Alberta.
But he pointed to how oil prices rose from US$25 in 2002 to US$100 in 2012 — a period in which the loonie’s value increased from US$0.62 to above parity.
This helped reduce inflationary risks that came with stronger growth and increased national income, Poloz added.
“Similarly, over the past year, both oil prices and the Canadian dollar have fallen sharply. The floating currency is helping to reduce the disinflationary risks that have come with the cut in our national income,” he said.
While Poloz acknowledged Canada’s reliance on resources and vulnerability to price shocks in the commodity sector complicates economic policies, he said it’s far better for a country to have these resource than to not have them.
“Canada has seen this movie before—we’ve managed it well in the past, and I’m confident we will continue to manage it well in the future.”
