Stephen Poloz says divergent monetary policy may see loonie lower

Bank of Canada governor Stephen Poloz says he won't try to match recent interest rate increases in the U.S., and will instead set monetary policy in Canada with the goal of controlling inflation.

Central bank will 'continue to run an independent monetary policy, anchored by our inflation target of 2%'

Stephen Poloz cut the Bank of Canada's benchmark interest rate twice last year.

The Bank of Canada sent a strong signal today that it is content to allow the weak Canadian dollar to stay low.

Bank governor Stephen Poloz says he won't try to match recent interest rate increases in the U.S., but will "continue to run an independent monetary policy, anchored by our inflation target of two per cent."

Canada twice cut its benchmark interest rate in 2015 in an attempt to stimulate the economy. The U.S., meanwhile, finally hiked its rate in December after six years at record lows.

Normally, the two countries have monetary policies that move in broadly similar directions. But the U.S. hiking of rate as Canada cuts them — a phenomenon known as "divergence" — could have unexpected consequences, especially for the loonie which lost 16 per cent of its value last year while the two central banks were moving in opposite direction.

In a speech at Ottawa City Hall, Poloz explained that the weak loonie is the result of weak prices for Canada's commodities, particularly oil.

"It is not a coincidence that the Canadian dollar is about where it was back in 2003 and 2004," Poloz said. "Oil prices are also about where they were back then.

"The depreciation of our currency is a natural part of the process."

Following the speech, he bristled at the suggestion during a media Q&A that he was "cheerleading" the loonie's decline.

"It's not something to cheer for," he said. "We would of course prefer oil prices to be a little higher."

Poloz explained that because Canada is a net exporter of commodities, while the U.S. is a net importer, the impact on the terms of trade for the two economies has been different.

He said that fact suggests the divergence between U.S. and Canadian monetary policies will continue, and the loonie is likely to stay low for the foreseeable future.

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