Monday, January 27, 2014

Lower loonie may not be so bad

A devalued loonie, coupled with low inflation, comes talk that the Bank of Canada (BoC) might consider cutting its overnight lending rate. The Canadian dollar hit its lowest level in three years last week, falling to 90 cents and the first time it has closed below 94 cents since June 2010. Could the BoC cut its rate to lower than the 1% it’s currently at? It could, according to some economists.  However, by looking at other new developments, the answer may be no.

The Canadian economy, over the past few years, has been buoyed by consumer spending and the housing sector, as we waited for global economies to turn the corner. As those economies start to ramp up their production, and as the American economy, our largest trading partner, starts to strengthen, it puts more pressure on our currency. The jobs numbers from Statistics Canada haven’t been great, and the trade deficit keeps widening. To stay competitive, something has to give, so our dollar starts to drop in value. This is not necessarily a bad thing for Canada’s big picture.

Earlier this week, the banks started quietly lowering their fixed mortgage interest rates. Then, BoC Governor Stephen Poloz’s rate announcement maintained the 1% prime lending rate, but his report also mentioned that low inflation was a concern. It remains at 1.2%. Poloz, however, doesn’t want to encourage more consumer spending, which is why he may not touch the trendsetting rate.

Another reason, of course, is that a weakened dollar is actually good for the economy.  Consumers will feel the immediate pinch with higher costs at retail outlets and grocery stores. Travel will cost more and cross-border shopping may not be a bargain anymore but the upside to the economy will eventually benefit most consumers.

A weaker dollar is good news for the manufacturing sector and exporters and to the people who work in those sectors. It means more jobs, income increases and bonus payments.  When consumers have more money, they will spend it, which will pump up a slowed retail sector. The lower loonie will also increase competitiveness and help sustain the economy.

While the retail and tourism sectors will be hit, there’s flip side. Canadians may decide to stay in the country and explore Canada. Cross-border shoppers may stay home and spend their money locally. Since American travellers are the most important source of tourism revenue for Canada, a lower loonie may start attracting them again. 

Like it or not, the weaker dollar may be here to stay. For now it may end up being the fuel to fire up the sluggish economy.