Canadian Manufacturing

More stimulus needed to manage inflation: BoC

"Persistent headwinds" could mean that "some degree of stimulus" will be needed

TORONTO—The Canadian dollar headed lower September 22 as a top Bank of Canada official said the country’s struggling economy still needs low interest rates to help with the recovery.

The loonie fell 0.70 of a cent to 90.65 cents US.

Bank of Canada senior deputy governor Carolyn Wilkins said in a speech that “persistent headwinds” could mean that “some degree of stimulus” will be needed to keep inflation on target, even after the economy returns to full capacity.

Wilkins also said the neutral interest rate—the level at which the economy can be sustained at full capacity with stable inflation—has dropped to a range of three to four per cent, about 1.5 percentage points lower than before the economic downturn.

The lower estimate means interest rates could be lower than they have been in the past when the economy is running at full steam.

Last week, Bank of Canada governor Stephen Poloz said the central bank will continue a hands-off approach regarding the loonie, saying that trying to interfere with the direction of the currency would hurt the bank’s ability to pursue independent monetary policy.

Economists have long suggested that Poloz’s dovish talk on interest rates has helped take some of the shine off the loonie in a deliberate move to bolster exports.

The Bank of Canada has kept its key interest rate at one per cent for four years.

Meanwhile, the U.S. Federal Reserve also said recently it was not considering raising short-term interest rates from near zero any time soon. The reassurance from the Fed has helped lift the U.S. dollar in recent days.

“We’re seeing a bit of a shift, a slow migration of expectations of what Fed policy might look like in 2015, with the potential for a rate hike in mid-2015. As a result, we’re seeing expectations for the U.S. dollar be adjusted as well,” said Craig Fehr, a Canadian market strategist at Edward Jones in St. Louis.

“The U.S. economy is really starting to stand out as a leader for growth. There’s some momentum in that economy at the same time as Europe is sputtering along and China is slowing down. I think that will only serve to strengthen the U.S. dollar as well.”

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