SASKATOON, Saskatchewan (Reuters) - The Bank of Canada will pay close attention to how the economy responds to both higher interest rates and a stronger Canadian dollar, and remains data-dependent as it looks ahead to further decisions on interest rates, a top official said on Monday.
Bank of Canada Deputy Governor Timothy Lane reiterated the bank’s previous message that growth is becoming more broadly based and self-sustaining, while emphasizing that policy remains appropriate following the bank’s two recent rate hikes.
“Each decision is a live decision .... We’re watching the numbers as they come along, we’re trying to understand how the economy is evolving and therefore what degree of monetary policy stimulus is still appropriate,” Lane said after a speech to the Saskatoon Regional Economic Development Authority.
Lane said the stronger Canadian dollar, which hit a two-year high against the greenback following the bank’s Sept. 6 rate hike, is something policymakers will watch closely given currency strength dampened exports in the past.
“Now as the Canadian dollar is strengthening, we’re certainly watching that closely and we’ll be taking that into account pretty strongly in making our decisions,” Lane said in response to a question from the audience.
The Canadian currency CAD= weakened following Lane's remarks, dipping to 1.2338 to the U.S. dollar, or 81.05 U.S. cents, its weakest point since the day of the rate hike, and market-watchers said extra volatility may be expected now at every Bank of Canada speech or policy meeting.
“There is clearly an agenda of some sort here and it may be to simply nudge market expectations away from an additional rate increase coming in October and more towards December,” Scotiabank currency strategists Shaun Osborne and Eric Theoret wrote in a research note after Lane’s appearance.
Lane also said that Canadian households are far more indebted now than they have been in the past when interest rates were closer to neutral, but said a stronger Canadian economy should help boost incomes to help consumer cope with debt costs.
He also said low rates helped drive Canada’s housing boom, but neither low rates nor double-digit home price appreciation will last.
Lane outlined what went into the bank’s unexpected decision to raise rates two meetings in a row, saying the resource economy was rebounding even as the rest of the economy was continuing to grow strongly.
“So that’s kind of what data dependent looks like,” he said.
Reporting by Andrea Hopkins and Leah Schnurr; Editing by Marguerita Choy and Sandra Maler