Oh Canada! The dollar's strength baffles bank governor
Interest rates may rise because of inflation risk
Eric Beauchesne
CanWest News Service
Thursday, June 14, 2007
OTTAWA -- Bank of Canada governor David Dodge admitted Wednesday that he is puzzled by the recent strength in the Canadian dollar, but suggested that it won't stop the bank from raising interest rates.
"It's hard to explain all of that movement," Dodge said following a speech in St. John's.
"Since April, we have seen two things: an increased risk of future inflation, and a rise in the dollar that appears to have been stronger than historical experience would have suggested," he said, in an apparent attempt
to talk down the dollar.
The rise in the dollar tends to dampen growth and inflation, Dodge said. But he reiterated that the economy has also been stronger and inflation higher than the central bank had expected and, as a result, it may have to raise
interest rates.
"There is an increased risk that future inflation will persist above the two-per-cent inflation target," he said. "Some increase in the target for the overnight rate may be required in the near term to bring inflation back to the target."
His comments came as the dollar was recovering from a retreat to a two-week low against the U.S. greenback earlier in the day which followed news of surprisingly strong consumer spending south of the border and weaker than expected factory shipments here.
However, Canadian analysts said the unexpected 0.6-per-cent drop in manufacturing shipments in April masks evidence of some underlying strength in the struggling sector and won't keep the central bank from starting to raise interest rates next month.
"Today's report on Canadian manufacturing shipments was anything but weak," said TD Securities economist Marc Levesque. "The fact that the weakest sector of Canada's economy appears to be holding on, and may in fact be
starting to claw its way back, just adds to Canada's resilient economic backdrop."
He and other analysts noted that for the first time since March 2006, shipments were above their year-earlier levels, and that a surge in unfilled orders points to further increases in shipments in the months to come.
BMO Capital Markets economist Sal Guatieri said the report suggests overall economic growth in the spring quarter could be stronger than expected, possibly three per cent or more.
