Carney Says Bank of Canada Will Be `Careful' on Rates With U.S. Slowing
Bank of Canada Governor Mark Carney said today that downside risks to the global recovery are “non- negligible” and the central bank will be “careful” in considering the implications of slower U.S. growth when deciding whether to raise interest rates further.
“Renewed weakness in the United States could have important implications for the Canadian outlook,” Carney said in remarks he gave at a conference in Calgary today. “The Bank will have to chart a careful course for Canadian monetary policy.”
Carney’s remarks prompted investors to revise down odds of further interest rate increases after the bank’s statement earlier this week raised expectations it may increase borrowing costs again this year. The bank said Sept. 8 that domestic demand will probably “remain solid” and that its inflation outlook was “essentially unchanged.”
“I would view this as undermining the market’s perspective that the Bank has adopted a hawkish tone,” said David Tulk, a senior macro strategist at Toronto-Dominion Bank who expects the central bank won’t raise interest rates again until March 2011. By Carney mentioning “non-negligible risks on the downside,” the balance of risks “could be shifted a little bit in that direction,” Tulk said.
Carney said at a press conference after delivering the remarks that having a speech following an interest-rate announcement gives “more time to elaborate views.”
‘Elaboration’
“We’ve seen some renewed weakness in the course of the last couple of months,” he said. “We mentioned that in our most recent rate decision, we integrated that into our analysis and the comments in the speech are an elaboration of that.”
The Canadian dollar weakened after Carney’s speech, falling 0.2 percent to 1.0358 per U.S. dollar at 3:12 p.m. in Toronto from 1.0339 late yesterday. The currency had appreciated to 1.0288 earlier today. One Canadian dollar buys 96.54 U.S. cents.
Carney repeated some language from the interest-rate announcement, saying “any further reduction in monetary policy stimulus would need to be carefully considered in light of the unusual uncertainty surrounding the outlook.”
Carney also said that the global recovery is “at risk” if changes agreed upon at June’s Group of 20 meeting in Toronto aren’t implemented. Emerging economies have made commitments for greater exchange-rate flexibility, lower savings and increased infrastructure spending, he said, and advanced economies have said they will complete stimulus programs and cut deficits in a way that is “growth friendly.”
‘Somewhat Slow’
Carney also said emerging economies have been “somewhat slow” in realizing that a fixed exchange-rate policy is becoming self-defeating as their relative share of the world economy increases.
China’s recent decision to increase the flexibility of its currency is “welcome,” and the full implementation of the policy would contribute to “strong, sustainable and balanced global economic growth.”
The remarks come two days after U.S. Treasury Secretary Timothy F. Geithner said in a Bloomberg interview that China needs to let the yuan rise more quickly to show trading partners that it’s following through on earlier commitments.
Premier Wen Jiabao’s government has limited the yuan’s gain to less than 1 percent versus the dollar since a June pledge for greater flexibility. With November elections approaching, U.S. legislators have planned hearings on the topic and may push a bill to let U.S. companies seek tariffs in compensation for an undervalued yuan that makes Chinese goods cheaper overseas.
Currency Adjustments
Emerging economies are resisting currency adjustments because they lack confidence in global monetary and financial systems, Carney said. Countries that peg their currencies to the U.S. dollar risk importing the Federal Reserve’s monetary policy, which could create new strains, he said.
A new reserve currency to replace the U.S. dollar wouldn’t solve global problems, because it wouldn’t change the incentives emerging countries face, Carney said. As such, the U.S. is likely to remain the reserve currency for the “foreseeable future.”
To contact the reporters on this story: Theophilos Argitis in Calgary at targitis@bloomberg.net; Alexandre Deslongchamps in Ottawa at adeslongcham@bloomberg.net.
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