OTTAWA — The Bank of Canada is warning it is prepared to intervene to ensure Canada’s fragile economic recovery is not derailed by a resurgent loonie.
With evidence mounting that the economy is emerging from a short but deep recession, deputy governor Timothy Lane cautioned Tuesday that the recovery is still uncertain and the loonie’s strength is worrying.
“The Canadian economy is expected to start growing again this quarter,” Lane told a business audience in Kingston, Ont., adding that signs of growth are also appearing in the United States and the global economy.
But he noted that much of that growth to date has been on the back of government and central bank stimulus and he cautioned that should the loonie continue to rise, it could undermine the recovery.
“A persistently strong Canadian dollar could reduce real growth and delay the return of inflation on target,” he said.
“If a stronger dollar were to alter the path of projected inflation . . . we would need to take that into account.”
A high dollar hurts exporters because it makes Canadian exports to the United States more expensive for American buyers forcing them to seek cheaper alternatives and buy products from American or overseas companies instead.
Strength in the loonie has hurt the Canadian forestry sector particularly hard, squeezing sales of paper, lumber and building products, leading to mill closures and job cuts across Canada.