BOC governor Dodge wins guarded approval

Dodge, who has been at the helm of Canada's central bank since late January, has taken over the direction of the country's monetary policy in a smooth and reassuring fashion from his low-keyed predecessor, Gordon Thiessen, analysts say.

While he strikes many as more open and candid than Thiessen, Dodge, 58, is widely seen as continuing the cautious, considered style many have come to associate with Canada's central bank.

An academic and bureaucrat rather than a career central banker, Dodge's appointment initially aroused some concern that it might undermine the bank's independence.

Dodge had served as deputy finance minister during the critical mid-1990s period when Liberal Finance Minister Paul Martin was grappling with the federal government's enormous deficits, and some observers were worried his appointment could compromise the bank's independence from government.

But few now mention any such concerns. Dodge, who insiders say was not shy about expressing his disagreements with his political masters as a top bureaucrat, is seen as completely autonomous at the central bank.

"That could have been a potential problem for him - his close association with government - but it hasn't hurt him, it's worked in his favour," said Rob Palombi, senior fixed-income analyst at Standard & Poor's.

The detailed, hands-on knowledge of the Canadian economy Dodge developed in the finance department has helped him as central bank governor, said Palombi and other analysts.

The transition between governors has been largely without incident at a challenging time for Canadian monetary policy.

While the U.S. economy has slowed markedly during Dodge's time in office, the Bank of Canada has not cut interest rates nearly as aggressively as its U.S. counterpart.

Since the beginning of the year, it has cut the overnight target rate a total of 150 basis points to 4.25%, compared to the 275 basis points of easing in the U.S.

Questions Raised About Bank's Optimistic View

Some have criticised the bank for expressing an unduly optimistic view throughout the U.S. slowing. The bank has repeatedly forecast - most recently in its monetary policy update on 1 August - that a recovery in U.S. growth would enable Canada's economy to bounce back from its current sluggish growth to 2.5% to 3.5% growth in the second half of the year.

Few are willing to entirely condemn the bank's go-slow approach to easing yet, since Canada's economy has continued to perform strongly despite some inevitable slowing due to the slowdown in the U.S. Many observers say Dodge's predecessor would have pursued a similar path.

"I think if Mr. Thiessen had been there, you would have seen the same thing," said Rick Egelton, deputy chief economist at the Bank of Montreal.

Andrew Pyle, senior economist at the Bank of Nova Scotia, said the first six months of Dodge's tenure were focused on an effort to establish his inflation-fighting credentials. Having established them, Dodge is now in a position to pursue a more flexible policy and respond to evolving fundamentals, he said.

"The first six months of his tenure are over, and the technical or structural moves by a new central bank governor to perhaps lean more to the hawkish side and establish credibility don't need to be done any more," Pyle said. "They can just simply look at the fundamentals now, and recognise that things aren't as great as they looked in May."

Dodge has clearly signalled his support for the bank's formal inflation control range of 1.0% to 3.0%, which was renewed for another five years in May in an agreement with the Finance Department.

While there was some uncertainty as to whether the bank would stay in the same policy groove when Thiessen took over from his predecessor John Crow, it was clear from the very beginning of Dodge's tenure he embraced the inflation control targets, said Andrew Spence, global head of currency and credit market research at T.D. Securities Inc.

Since the bank, unlike its U.S. counterpart, does operate under fairly tight policy parameters, some have suggested the question of who actually occupies the governor's chair is of relatively little consequence.

But it's still important who is putting the policy into practice, said David Laidler, Bank of Montreal professor of economics at the University of Western Ontario.

"There's quite a lot of room for a bank governor who doesn't know what he is doing to make important mistakes, and I don't think they're have been any," said Laidler.

"You don't want the central bank governor to be in the headlines every day, and the very fact he isn't suggests that competence is the order of the day," he said.

One difference that some observers point to is an increased openness on Dodge's part.

"The plus side is Mr. Dodge is a very open individual, and certainly keen to debate economic policy issues, and I think that has really been what he's brought to the table," said the Bank of Montreal's Egelton.

One example analysts cite is Dodge's testimony on the subject of Canada's floating exchange rate system to a House of Commons committee in May.

While his predecessors usually shut down any discussion of Canada's exchange rate regime with a blunt affirmation of the current system's superiority, Dodge said, from a purely economic point of view, there may come a time when economic integration between Canada and the U.S. mean that the costs of a separate currency outweigh the benefits.

Dodge reaffirmed the appropriateness of the floating rate regime in subsequent speeches, but his willingness to openly discuss the issue impressed many observers.

But even the trend towards greater openness was initially set in motion under Thiessen's stewardship, Laidler said.

"If you look back over Gordon Thiessen's governorship, improving the bank's communications with the business community, the political community, the media and the general public seemed to be very much a policy agenda," he said.