The effects of U.S. trade unknowns, lower oil prices and weaker housing and consumer spending are behind the recent deceleration in economic growth, a Bank of Canada deputy governor said in a speech Wednesday.
To help the economy get through this “temporary” soft patch, Timothy Lane is expecting the lower Canadian dollar to provide support.
Lane told a Washington audience that the loonie has been influenced by these factors as well as the indirect effects related to fiscal stimulus that has energized the American economy. The results have led the U.S. Federal Reserve to raise interest rates, he added.
“This combination of factors has been putting downward pressure on the Canadian dollar,” Lane said in his address to the Peterson Institute for International Economics.
“The lower Canadian dollar, in turn, will help support the economy through this period.”
Last month, Bank of Canada governor Stephen Poloz kept his benchmark interest rate unchanged at 1.75 per cent as the economy navigates what he described as a temporary period of softness created by a recent, sharp decline in world oil prices.
Poloz said the central bank will continue raising rates once Canada the economy builds new momentum. A stronger economy has prompted him to hike the rate target five times since mid-2017 to keep inflation from running too hot.
On Wednesday, Lane also said uncertainty related to U.S. trade policies has kept business investment lower than where it should be at this point, given the overall strength in the Canadian economy.
Lane’s speech focused on explaining how Canada manages its foreign reserves, which he noted are about US$85 billion or five per cent of the country’s gross domestic product.
He described the size of Canada’s foreign reserves as modest yet adequate because the country has a freely floating exchange rate.
Lane noted that other central banks and monetary authorities have started adding Canadian-dollar assets to their reserve portfolios following the global financial crisis about a decade ago. Reserves in Canadian dollars are now about $200 billion, he said.
“The move to hold a portion of reserves in Canadian dollars is part of a broader strategy of reserve diversification,” he said.
“It is also, in some sense, a vote of confidence in Canada: reserve managers tell us they are attracted by Canada’s sound financial system and fiscal position, as reflected in its high credit ratings.”