The Canadian economy continues to adjust to global economic changes, and that the Bank of Canada intends to help that adjustment by keeping the economy operating near its potential while also containing inflation, Deputy Governor Sheryl Kennedy said today.

In a speech to the International Finance Club of Montreal, she noted that a strong global economic expansion has contributed significantly to a sharp rise in the prices of energy and other commodities. “Together with downward pressure on the U.S. dollar because of that country’s very large current account deficit, these improved terms of trade have led to a sharp appreciation of the Canadian dollar,” Kennedy said. “At the same time, Canada has experienced increased competition from the rapidly growing economies of Asia, especially China. But we have also been presented with new opportunities to expand trade with these countries and to tap lower-cost supplies.”

“These global developments, while clearly yielding benefits for Canada, have also necessitated adjustments involving significant shifts among economic sectors, and thus shifts in employment, but also new opportunities for growth,” she added. “Higher prices for energy and other commodities, the appreciation of the Canadian dollar, the opening of new markets, and lower import costs have implications for firms and individuals across Canada.”

“Over the past three years, changes in relative prices, including the appreciation of the Canadian dollar, have contributed to a reallocation of labour and capital from the production of non-commodity tradable goods to the production of commodities,” she noted.

“The flexibility and diversity of the Canadian economy are also helping to facilitate adjustment to global economic developments,” she added, pointing to strong growth in capital spending in commodity-producing industries, and higher capital spending and employment in sectors with low exposure to international trade.

“Here in Quebec, and in central Canada more generally, the strong Canadian dollar and increased energy costs have posed a significant challenge to manufacturers and service providers facing international competition,” Kennedy allowed. “For Canada as a whole, including Quebec, exports have continued to grow, despite the higher Canadian dollar. And investment in machinery and equipment suggests that a good number of firms are taking advantage of the stronger exchange rate to improve their productivity and enhance their competitiveness.”

“And, of course, healthy final domestic demand, underpinned by rising incomes and relatively low interest rates, has continued to support economic growth in Canada during this period of significant economic adjustment,” she noted.

“But the adjustment process is not over. We continue to experience changes in the prices of commodities relative to other products, in the exchange rate, and in the world demand for Canadian goods and services,” Kennedy said. “Energy prices, in particular, have surged over the past year, and the associated effects are still working their way through our economy. Increased competition from abroad and structural changes in demand are other important economic forces at play that also require adjustment.”

“For its part, the Bank of Canada will continue to help facilitate adjustment by conducting monetary policy with a view to keeping the economy operating at its potential and inflation close to the target. We will be closely monitoring economic developments and assessing their impact,” she concluded. “We remain confident that our monetary policy framework will continue to provide the firm foundation needed as we work to help Canada deal effectively with global economic change.”