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Expect Interest Rate Policy Divergence, says the Bank of Canada

by Yvonne von Jena | January 7, 2016


In a recent Bank of Canada media release, the Bank of Canada’s Governor Stephen Poloz said that we should expect Canada’s policy to diverge as economies adjust to shocks, and that these diverging monetary policies are the natural consequence of large declines in resource prices. He said, “The Bank of Canada will continue to run an independent monetary policy, anchored by our inflation target, and we will use our tools to manage risks along the way.” The interest rate increase last month by the U.S. Federal Reserve is the first step in a long process toward normalizing monetary policy in the United States, said Mr. Poloz. Although this has implications for Canada and its financial markets, the Bank is well equipped to respond. He noted, “We have a number of tools at our disposal—both conventional and unconventional—to mitigate risks to our inflation target or to our financial system, should they arise.” The drop in resource prices has meant large declines in the terms of trade for Canada as a resource-producing country. This shock is reversing trends established in Canada over the past decade, and “policy-makers should facilitate the necessary economic adjustments”. Canada’s flexible exchange rates are offsetting some of the drop in commodity prices, but not completely. “The forces that have been set in motion simply must work themselves out,” said Mr. Poloz.


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