09/16/2014 12:46 EDT | Updated 06/16/2017 00:53 EDT

Currency markets no place for Bank of Canada to intervene, Poloz says

DRUMMONDVILLE, Que. - The Bank of Canada vowed to continue taking a hands-off approach to influencing the Canadian dollar, saying it can't replace markets in determining the appropriate level of the loonie.

Targeting the exchange rate would see the bank lose its ability to pursue an independent monetary policy and cause more harm than good, governor Stephen Poloz said Tuesday in a speech to business leaders in the export-oriented central Quebec region near the U.S. border.

"A floating loon is a thing of beauty, and so is a floating loonie, at least from this economist's perspective," he said in his second speech in Quebec since heading the bank.

The economic conundrum facing Canadian policy-makers is how to spur economic growth in the face of a strong loonie which hurts exporters, whose sales are essential to revving Canada's economic engine.

However, Poloz, who headed Export Development Canada before taking the top job at the central bank, said calls for the Bank of Canada to step into the currency market as a solution won't be answered.

Some economists have suggested that Poloz's "dovish" talk on interest rates and the economy has helped take some of the shine off the loonie. The Canadian dollar was worth about 97 cents US when Poloz took over the top job at the central bank last year. The loonie climbed more than half a cent Tuesday to 91.16 cents US.

Poloz said Tuesday that the Bank of Canada's job is to not to interfere in the market, but understand the context it is providing as the bank chooses how to set interest rates to meet its inflation targets.

"Trying to hold the dollar constant would give us larger fluctuations in unemployment, output and inflation and, in the end, would not help us maintain our international competitiveness," Poloz said.

In the past, Poloz was seen to be taking a dovish position on the loonie, referring to a weaker Canadian dollar as "icing on the cake" to improved foreign demand, especially from the United States.

A weak loonie makes Canadian products cheaper for those looking to buy using U.S. dollars.

CIBC chief economist Avery Shenfeld said the remarks by Poloz could be a slight plus for the Canadian dollar as he did not do anything to encourage a further weakening of the loonie.

"Still, while leaving the Canadian dollar to markets, the governor knows that interest rate decisions ahead can impact where the markets take the Canadian dollar, and our view that Poloz will lag the Fed in the next rounds of tightening will promote a softer loonie in 2015," Shenfeld said.

Statistics Canada reported earlier this month that the country's trade surplus with the world for July grew to $2.6 billion, well ahead of economist expectations as exports grew and imports slipped lower.

Helping drive the improvement was growth in the trade surplus with the U.S., which has seen its economy improve in recent months.

The central bank governor said he is "cautiously optimistic" about the export trend of the past five or six months but said it will take longer for the gains to be translated into business investment and job creation.

"Those things take time and we have experienced serial disappointment for several years in a row and so there's still a strong case to be waiting and seeing," he said at a news conference.

Energy products are expected to continue to lead exports, but Poloz said a bit of an upturn in non-energy exports doesn't signal a turnaround, chalking up half the rebound to the weather.

Productivity has risen as companies have increased export sales without hiring more workers. He said a rise in export-related employment will be slow because of lingering uncertainty that's also prevalent globally.

"Companies are holding back from making investments and expanding employment because they just aren't sure if the global economy is real," he said.

"It's all part of baking a cake — the ingredients are there and it takes a certain amount of heat in the oven for it to all come tegother."

Poloz also suggested there is room for job growth since about 200,000 youth and more than 100,000 prime-aged workers are seeking employment.

The U.S. Federal Reserve met Tuesday ahead of an interest rate announcement on Wednesday.

Traders will be looking for any hints on whether it will raise interest rates sooner than mid-2015, when it is generally expected that short-term rates will start to head up from near zero.

The Bank of Canada's next rate announcement is set for Oct. 22 when it is also expected to publish an update to its monetary policy report.

The Canadian central bank's key rate has been set at one per cent for four years.

— With files from Stephanie Levitz in Ottawa

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