1 hour, 21 minutes ago
OTTAWA (CP) - Bank of Canada governor David Dodge has taken the unusual step of weighing in on the surging Canadian dollar, suggesting that the loonie may be higher than economic factors warrant.
However, Dodge also said Wednesday he may have to raise interest rates in July to bring down inflation. Higher interest rates would tend to further increase the value of the currency.
Dodge said in a speech prepared for a business luncheon in St. John's, N.L., that the loonie has been significantly stronger against the U.S. dollar than other major world currencies.
He said many of the reasons are apparent - the strength of the Canadian economy, high commodity prices and heavy demand for Canadian goods and services - but these do not explain all of the currency's increase.
"The overall response of the Canadian dollar to these factors appears to have been stronger than historical experience would have suggested," he said.
The speech may be an attempt by the central banker to cool the hot currency, which has topped 94 cents US this month, up from under 90 cents a year ago.
Some economists predict it will reach parity with the greenback by the end of the year.
The strong dollar has been cited by manufacturers as a key cause of the slump in the sector and the loss of factory jobs in Ontario and Quebec.
Still, Dodge used the St. John's speech to again warn that he may soon have to raise interest rates.
Dodge said the economy has overshot expectations in the first quarter of the year, and there is an increased risk that inflation will remain higher than the bank's two per cent target.
He said the world economy has performed much as forecast but the Canadian economy "has come in stronger than we had been expecting."
"Indeed, the national accounts indicated that the Canadian economy grew by 3.7 per cent in the first quarter of this year - more than a full percentage point higher that we projected in the April report."
Repeating language he used in May, when he kept the bank's overnight target rate at 4.25 per cent, Dodge said: "Some increase in the target for the overnight rate may be required in the near term to bring inflation back to the target."
The overnight target rate has remained at 4.25 per cent for over a year.
Dodge's main focus of his speech was the aging boomer generation, saying that as more Canadians retire the economy's ability to grow will slow down.
He said that up till now, labour growth has contributed about 1.25 per cent to annual growth of gross domestic product. But he said that on current trends, labour input will actually decline by about one per cent in 2010 and continue to fall after that.
This means Canadians will have to get used to slower growth, he said.
To address this problem, Dodge said Canada needs to increase its productivity and governments must ease labour mobility and remove barriers for older Canadians who want to keep working.
"We should minimize constraints on labour mobility and participation," he said. "Second, we should concentrate on increasing productivity, so that we can have sustainable economic growth and rising standards of living in the future."