A stronger Canadian dollar is vital to increasing the nation's productivity and Corporate Canada is learning to live with it, Bank of Canada Governor David Dodge said on Wednesday.
"Because it makes machinery and equipment less expensive relative to labour, a stronger currency is in line with our need to increase productivity, as well as with the future demographic pressures on our labour force," Dodge said during a speech in Montreal.
The problem has been the speed with which the loonie has appreciated over the past year thanks largely to the weakness of the U.S. dollar. In 2003 the loonie jumped in value by about 20 per cent, from around 63 US cents to around 77 US cents. Many forecasts, including one Tuesday from TD Bank, see a finish for this year around 80 US cents or even higher.
The strong gains in the loonie have led the price of Canadian exports to spike on foreign markets, reducing demand to the detriment of the export and manufacturing sectors.
Dodge repeated comments made by his senior deputy governor, Paul Jenkins, on Monday that the strong loonie will force the economy to rely on domestic demand for its recovery from the trials of 2003.
"We know that with a stronger currency, the economy will have to rely more on domestic demand for ongoing, solid growth. We will take this into account as we set monetary policy," Dodge said.
Last month, the central bank cut its key overnight lending rate by 25 basis points, from 2.75 to 2.5 per cent, to offset the negative impact of the loonie on economic growth.
Despite the impact of the loonie, Dodge added that most Canadian companies remain "reasonably optimistic" about the future.
"Most firms are acting to raise productivity, as well as cutting costs, adjusting supply chains, and hedging their currency exposure, among other efforts," he said.
"Those businesses that have been helped by the stronger currency are also adjusting, by lowering prices, strengthening their balance sheets, and in some cases, increasing productivity."
At this point most market watchers expect another interest rate cut from the central bank's next policy-setting meeting on March 3.
