Central bank watching loonie carefully

(February 17, 2004) The Bank of Canada is keeping a close eye on the strength of the Canadian dollar as it considers the direction of interest rates, says governor David Dodge.

In a speech today in Mexico City, Dodge said the central bank’s short-term goal is to keep inflation around the 2% mark. But he added the bank must also keep on top of longer term forces that are driving adjustments to the economy.

“We know that, with a stronger currency, the economy will have to rely more on domestic demand and less on foreign demand for ongoing, solid growth,” Dodge said. “We will take this into account as we set monetary policy.”

The bank cut its overnight lending rate by 25 basis points to 2.5% in January, citing the high loonie. The next interest rate announcement is scheduled for March 2 and many economists expect a further rate reduction.

“Given Dodge’s emphasis on the importance of healthy domestic demand and the recent lack of exactly that, it remains a safe bet that the Bank of Canada will cut interest rates by 25 basis points in early March,” said TD economist Eric Lascelles last week.

“The bank should lower interest rates again in March when they next meet, and maybe even again in April,” added BMO Nesbitt Burns chief economist Sherry Cooper.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com