...

Debate rages over impact of soaring Canada dollar

Business Materials 20 September 2007 04:45 (UTC +04:00)

( Reuters ) - The Canadian dollar's flight toward parity with the U.S. dollar has reignited debate over the impact of the strong currency on inflation and on Bank of Canada interest rates.

One leading bank, Toronto-Dominion Bank, issued a report on Wednesday disputing the widespread view that a soaring Canadian dollar inevitably dampens consumer inflation. The Bank of Canada, it argues, is therefore still very much in the hot seat in the fight against inflation and may need to hike rates further.

"The Bank of Canada should expect to receive little help from the stronger Canadian dollar in its effort to remove the existing inflationary pressures in the Canadian economy," wrote Millan Mulraine, economics strategist, in the TD report.

Others see evidence that the currency's appreciation has softened prices, at least imported consumer goods. That has allowed the central bank to leave its overnight lending target on hold in an environment that would otherwise warrant a tightening of monetary policy.

"I think there is evidence that a strong Canadian dollar has not only impacted inflation but has also altered the course for the Bank of Canada," said Warren Lovely, senior economist at CIBC World Markets.

"The Bank of Canada was able to stop raising rates before the Fed and at a lower level largely because of the Canadian dollar appreciation."

Canada's dollar CAD= has extended 30-year highs over the past few days and most economists now expect it to push past parity with the U.S. dollar by year-end. Up 15 percent so far this year, the currency last had the same value as the greenback in November 1976.

After raising interest rates in July, Bank of Canada Governor David Dodge said the stronger Canadian dollar meant lower import prices and less pressure on inflation.

Latest

Latest