Bank of Canada Policy and the Rising Loonie

Bill Robson of Canada's C.D. Howe Institute is a superb, level-headed analyst. He recently had very nice piece in The National Post ($ subscription required; thanks to Jack for the pointer) about the rising U.S. price of the Canuck Buck and the appropriate response from The Bank of Canada. Quoting from the column,

The effects on the Canadian economy of the world’s changing appetite for natural resources are not something monetary policy can offset. While Bank of Canada governor David Dodge remains vigilant for signs that the exchange rate’s movements might affect Canadian growth enough to make the bank miss its inflation targets, responses to concerns about competitiveness or Canada’s economic structure arising from the loonie’s flight are not his responsibility.

Talk about perceiving money as neutral! (as indeed it is in the long run).

Now let's wait for politicians to start putting pressure on the Bank to reduce interest rates in order to help out Canadian exporters. Steve Poloz, Chief Economist for Export Development Canada, in his weekly newletter, identifies these industries as most vulnerable:

(1) clothing, leather and textiles;
(2) furniture;
(3) fabricated metals;
(4) electrical appliances; and
(5) services, especially tourism.

I expect these are industries in which, for the most part, Canada does not have much, if any, comparative advantage. Many of the firms in these industries were surviving primarily because the Canadian dollar was undervalued relative to purchasing power parity.