Bank of Canada Govenor David Dodge said yesterday that the central bank may have to cut interest rates if the loonie continues to soar.

Inn an unusually strong statement on the currency, Dodge told a university audience in St. John’s that if the dollar climbs too high, the bank may have to act.

In a speech that focused on the effects of monetary policy on labour markets, Dodge said, “Clearly, the appreciation of the Canadian dollar is an important factor that we at the Bank are considering carefully as we evaluate the economic situation and the risks attached to our outlook.”

Still, he stressed that it is also continuing to assess the impact of a somewhat stronger-than-expected recovery in world demand. “In this context, if it looked as though the appreciation of the Canadian dollar would more than offset the effects of stronger world demand, or that world demand was weakening, we would act to stimulate domestic demand with the intent of returning inflation to the 2% target over the next 18 to 24 months. Such action would take the form of lowering interest rates.”

Dodge reiterated his recent testimony before the Senate Banking, Trade and Commerce Committee, saying that the Bank continues to assess the implications of all past developments—domestic and external—for output and inflation in Canada.

He also said that the acceleration in labour productivity is a promising sign. “Indeed, increased investment in machinery and equipment as well as in communications technologies in the late 1990s, combined with sound economic policies, will likely see productivity gains remain strong in the near and medium term.”

http://www.bank-banque-canada.ca/en/speeches/2003/sp03-16.htm