Canada Monetary policy

Loonie to be strong under new governor

In response to the coronavirus pandemic, the Bank of Canada took bold and unconventional monetary policies. The Bank cut benchmark interest rate by 150bps to 0.25%, an effective lower bound; The Bank also expanded its balance sheet to CAD 460B, a size equivalent to 20%GDP. This is an increase from 5%GDP before the crisis. The increase is similar to that in the U. S. Though the pandemic does not hit Canada as hard as the south of the board, the Canadian economy endured more pain from very low oil prices.

With initial recovery of oil prices, the Canadian dollar regained some ground against the U. S. dollar. Under governor Poloz, the Bank of Canada has been in favour of weak loonie in order to stimulate Canadian export, especially to the U. S. Unfortunately that failed to realize. The economic recovery in the U. S. was slow during the Obama administration and needed less import from Canada. Late the Trump administration promotes buying-America. Weak loonie did not really help the Canadians, as a matter of fact, low value of its domestic currency made Canadians have to pay more for imports.

The new governor, Tiff Macklem, will assume his role tomorrow. Macklem was the No. 2 at the Bank of Canada just over a decade ago when Canada emerged from the global financial crisis. I believe he shared the views of Mark Carney who thought a strong loonie would benefit more to Canada. Canadian economy should move away from being dependent heavily on resources.

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