David Dodge, Governor of the Bank of Canada, hinted today that the pace of interest rate hikes may slow considering the weakening U.S. dollar.

The central bank chief made the remarks in his statement to the Senate Committee on Banking, Trade and Commerce. Dodge noted that the Canadian economy grew faster in the first half of the year than it had projected, largely because of a surge in exports. “The economy is now operating near its production capacity and continues to adjust to global developments,” he said.

He indicated that the Bank’s latest policy report assumes further reduction of monetary stimulus over time, “to keep the economy near its production potential and to achieve the inflation target”.

“We also emphasized that the pace of interest rate increases will depend on the Bank’s continuing assessment of the prospects for factors that affect pressures on capacity and, hence, on inflation,” he said.

Dodge said that one of the most significant developments has been a further depreciation of about 5% in the value of the U.S. dollar against other major floating currencies, including the Canadian dollar. “If current exchange rates were to be sustained — and if all other economic and financial factors were to remain unchanged — this would have a dampening effect on aggregate demand for Canadian goods and services,” he said.

“Since monetary policy aims to keep aggregate demand and supply in balance in order to keep inflation close to our target, we need to assess the implications of movements in the currency for aggregate demand and the context in which they occur — that is, the changes in other economic and financial factors,” Dodge concluded