OTTAWA - Canada's central bank must be prepared to rein in the dollar if it gets too high or risk hollowing out the country's industrial base, CIBC warned Tuesday, adding to calls for Bank of Canada governor Mark Carney to intervene in currency markets. The warning from the chief economist at Canadian Imperial Bank of Commerce (TSX:CM) comes at a time when the central bank has held out the possibility of intervention, although it hasn't said it will do so.

The Bank of Canada hasn't recently used its power to buy and sell huge quantities of Canadian dollars and other currencies to affect the loonie's value, although it has done so in years past.

"History has shown that intervention, in and of itself without policy moves that are consistent with the direction of that intervention, seldom is effective over the longer term," Carney told a House of Commons committee Tuesday.

But Carney said the recent rise in the Canadian dollar has created a "downside risk to the economy's recovery and that the bank has "considerable options" to achieve its mandate by maintaining inflation within a target range.

On currency markets Tuesday, the Canadian dollar closed at 93.80 cents US, up 0.08 of a cent. The loonie has dropped in recent days, but economists predict it could hit parity with the U.S. greenback in the next few months, mainly because of U.S. dollar weakness.

At the House committee, Liberal finance critic John McCallum, himself a former Royal Bank of Canada chief economist, asked whether the Bank of Canada has the tools to effectively regulate the value of the dollar given the size of the world's financial system.

"Maybe you don't want to reveal your arsenal publicly but, in addition to intervention, what other instruments would you consider for influencing the dollar if you perceive it goes too high?" McCallum asked.

Carney replied that one of the unconventional strategies that it has used is to lower the Bank of Canada's key interest rates to an all-time low and take the unusual step of saying the rate is likely to stay that low until mid-2010.

He noted the Bank of Canada has also considered, and publicly discussed, the possibility of "quantitative easing."

Quantitative easing is a tactic in which the central bank could directly buy securities from commercial institutions. The effect would be to increase the number of Canadian dollars in the economy, thus putting downward pressure on the currency's value and upward pressure on inflation.

"The bank retains considerable flexibility in the conduct of monetary policy," he said. "We have not had to deploy those instruments beyond the conditional commitment (to the lowest-possibly policy interest rate) . . .