SASKATOON, Saskatchewan (Reuters) – The Bank of Canada will pay close attention to how the economy responds to both higher interest rates and a stronger Canadian dollar, and remains data-dependent as it looks ahead to further decisions on interest rates, a top official said on Monday.
Bank of Canada Deputy Governor Timothy Lane reiterated the bank’s previous message that growth is becoming more broadly based and self-sustaining, while emphasizing that policy remains appropriate following the bank’s two recent rate hikes.
“Each decision is a live decision …. We’re watching the numbers as they come along, we’re trying to understand how the economy is evolving and therefore what degree of monetary policy stimulus is still appropriate,” Lane said after a speech to the Saskatoon Regional Economic Development Authority.
Lane said the stronger Canadian dollar, which hit a two-year high against the greenback following the bank’s Sept. 6 rate hike, is something policymakers will watch closely given currency strength dampened exports in the past.
“Now as the Canadian dollar is strengthening, we’re certainly watching that closely and we’ll be taking that into account pretty strongly in making our decisions,” Lane said in response to a question from the audience.
The Canadian currency CAD= weakened following Lane’s remarks, dipping to 1.2338 to the U.S. dollar, or 81.05 U.S. cents, its weakest point since the day of the rate hike.
Lane also said that Canadian households are far more indebted now than they have been in the past when interest rates were closer to neutral, but said a stronger Canadian economy should help boost incomes to help debt costs.
He also said Canada’s long period of low interest rates helped drive Canada’s prolonged housing boom, but that consumers should remember that neither low interest rates nor double-digit home price appreciation are normal – and they will not last.
Lane outlined what went into the bank’s unexpected decision to raise rates two meetings in a row – about a month earlier than many economists had expected – saying the resource economy was rebounding even as the rest of the economy was continuing to grow strongly.
“So that’s kind of what data dependent looks like,” he said.
In his speech, Lane said the bank would be watching the NAFTA negotiations very closely to gauge their implications for exports and business investment, noting the possibility of a “material protectionist shift” is a key source of uncertainty for Canada’s economic outlook.
Reporting by Andrea Hopkins and Leah Schnurr; Editing by Chizu Nomiyama and Marguerita Choy
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