Flexible Currency Benefits Exceed Costs, Bank of Canada Deputy Says

(Bloomberg) -- Bank of Canada Deputy Governor Lawrence Schembri highlighted the benefits of the country’s flexible exchange rate system, which he said acts as a buffer to shocks and allows policy makers to run an independent monetary policy.

Canada’s current policy framework has two components -- a 2% inflation target and a flexible currency -- and the benefits of floating exchange rates “far exceed” any costs associated with currency volatility, Shembri said Monday in a speech in Edmonton. Targeting an inflation rate of 2%, meanwhile, also provides a “credible nominal anchor.”

“The inflation target normally gets most of the attention, so the value of our floating dollar risks being overlooked at a time when the performance of flexible exchange rates is coming under greater scrutiny in international policy circles,” Schembri said, according to the prepared text of the speech.

The central bank won’t “alter” the flexible exchange rate component of its monetary policy framework, even as policy makers undertake a review of their mandate, Schembri said.

The speech doesn’t comment on the current outlook for the economy or interest rates.

Highlights

  • Evidence suggests Canada and other open economies have been “well-served by a market-determined flexible exchange rate”
  • For Canada, it has helped economy adjust to commodity price changes
  • Inflation targeting underpinned by floating currency is the most durable monetary policy framework of the post-war era
  • Flexible exchange rate complements inflation target to “help achieve low and stable inflation and keep our economy functioning well”
  • Four main benefits to floating dollar: permits monetary policy independence, buffers economy from shocks, contributes to policy clarity, promotes financial sector development
  • Speech made ahead of inflation targeting mandate’s renewal in 2021. “While we’re not going to alter the flexible exchange rate component of our monetary policy framework, it is incumbent on policy-makers to review even successful regimes regularly to ensure that they are serving the best interests of Canadians.”
  • On floating exchange rates, “none of the 40 or so countries that have credibly adopted it has subsequently abandoned it. It has truly withstood the test of time.”

©2019 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.