Bank of Canada governor says prolonged high energy prices complicate interest rate decisions
The central bank governor said it is becoming harder to ignore the inflationary impact of raised energy costs as time goes on.
BANGKOK — Bank of Canada Governor Tiff Macklem said the longer raised energy prices persist, the harder it becomes for the central bank to avoid raising interest rates.
Macklem made the comments during a panel discussion at the annual meetings of the International Monetary Fund and World Bank in Bangkok, Reuters reported on Friday.
"We haven't raise our rates yet. We've been looking through the increase in energy prices, but the longer this goes, the harder that gets," said Macklem.
The Bank of Canada's main goal is to maintain inflation between one and three per cent by adjusting interest rates up or down.
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Higher inflation typically leads central banks to raise interest rates, which can attract more capital inflows from global investors and increase demand for the local currency.
The price of oil is a key factor for the Canadian dollar, as petroleum is Canada's biggest export.
Generally, if the price of oil rises, the Canadian dollar also goes up as aggregate demand for the currency increases.
Higher oil prices also tend to result in a greater likelihood of a positive trade balance, which supports the currency.
The Bank of Canada influences the Canadian dollar by setting the level of interest rates that banks can lend to one another, which affects interest rates for everyone.
Relatively higher interest rates tend to be positive for the Canadian dollar.
The central bank can also use quantitative easing and tightening to influence credit conditions, with the former being negative for the Canadian dollar and the latter positive.
Macroeconomic data releases, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys, can all influence the direction of the Canadian dollar.
A strong economy attracts more foreign investment and may encourage the Bank of Canada to put up interest rates, leading to a stronger currency.
If economic data is weak, however, the Canadian dollar is likely to fall.
Other factors driving the Canadian dollar include the health of the U.S. economy, as it is Canada's largest trading partner, and overall market sentiment.
Whether investors are taking on more risky assets or seeking safe-havens influences the currency, with a risk-on attitude being positive for the Canadian dollar.
The trade balance, which is the difference between the value of Canada's exports versus its imports, is also a key factor.