Strong currency on Bank of Canada’s radar

By Louise Egan

GYEONGJU, South Korea (BestGrowthStock) – The strong Canadian dollar continues to be an important factor that could potentially slow Canada’s economic recovery, Bank of Canada Governor Mark Carney said in an interview on Saturday.

In a separate interview, Finance Minister Jim Flaherty said the Conservative government would consider expanding its emergency stimulus plan if there were new shocks to the economy, but said there was no sign at this time that such a move would be necessary.

Speaking at the conclusion of a meeting of G20 finance ministers and central bank governors in South Korea, Carney suggested the central bank was just as uneasy about the strength of the Canadian dollar as it was last year, despite using more subdued language on the currency this week in its interest rate announcement and quarterly outlook.

“What we said in the rate statement and the accompanying monetary policy report is that heightened tensions in currency markets did pose a downside risk to the recovery.”

“And further, that there was a risk around the competitive position of Canadian industry, which was also the product of and sensitive to the exchange rate and the path of productivity in the economy, so I would say that broader issues in foreign exchange market (Read more about international currency trading. )s continue to be important,” he said.

The currency briefly pushed past parity with the U.S. dollar earlier this month for the first time since April, and has stayed near those levels since. The move hurts Canadian exporters, which rely heavily on the U.S. market, and economists say it could make the path to recovery painstakingly slow.

The Canadian economy roared back to life in late 2009 after a recession and posted two quarters of galloping growth rates and prompting the Bank of Canada to hike its benchmark interest rate three times between June and September to 1 percent.

But growth slowed sharply in the second quarter to 2 percent, annualized, and an estimated 1.6 percent in the third quarter as the global recovery remains shaky and the U.S. buys fewer Canadian goods.

But the bank is betting that exports will start contributing more to growth in subsequent quarters, unless they are held back by a soaring currency. “That swing is dependent, amongst other things, on the persistence or not of the strength of the currency,” Carney said.

Flaherty, an avowed fiscal conservative before the global financial crisis hit, has vowed to “take action as necessary” to protect the recovery.

Additional fiscal stimulus could be in the cards if the economy took a sharp turn for the worse, he said, although he has adamantly resisted pressure from the political opposition to expand or prolong the existing stimulus package.

“We could always do more stimulus. Canada’s in a great position to do that because we paid down so much debt before the recession,” he said.

“But we don’t need to do anything based on the information we have now.”

Historically high levels of household debt in Canada, linked to the hot housing market that fueled the recovery, have raised alarm bells in both the government and central bank.

Carney said further steps could be taken to tame debt levels, while Flaherty said policy makers are keeping a close watch on the market to pre-empt the formation of a housing bubble.

(Reporting by Louise Egan)

Strong currency on Bank of Canada’s radar