Flaherty Anti-QE Stance Opens Central Bank, G-20 Rift

Canadian Finance Minister Jim Flaherty’s criticism of U.S. monetary policy, which he ramped up last week in Washington, may be putting him at odds with the Bank of Canada and the Group of 20.

Flaherty said he criticized the Federal Reserve’s use of unconventional monetary policy known as quantitative easing at a private dinner of G-20 officials on Oct. 10, with U.S. Federal Reserve Chairman Ben S. Bernanke in attendance.

“I was fairly clear” at the meeting, Flaherty told reporters the next day. “It’s not good public policy,” he said, describing quantitative easing as “the printing of money.”

The comments raise questions about how Canada would respond if the global economy faced a shock such as a U.S. default, because the Bank of Canada lists quantitative easing as one of the policies it can follow when its key policy rate is as low as possible. The central bank would need the consent of the finance department to pursue the policy because it could require the bank to buy riskier assets than usual.

The Fed surprised investors last month by deciding not to trim its $85 billion-a-month asset-purchase program, which is designed to support growth. Previous signals from Fed officials, including Bernanke, that they may curtail bond buying prompted calls from the International Monetary Fund, China and Mexico for the U.S. to communicate better.

G-20 leaders meeting in Russia in September said in a statement they recognize the support that has come “from accommodative monetary policies, including unconventional monetary policies.” They also said central bankers would make sure policy changes are “carefully calibrated and clearly communicated,” a pledge officials repeated on the weekend.

Growing Frustration

Flaherty’s comments may reflect the Canadian government’s growing frustration with a policy whose growth benefits have been questioned and which may have kept the currency stronger than it otherwise would be, crimping exports, said David Tulk, chief Canada macro strategist in Toronto at TD Securities.

“It does have a diminishing return, I think that’s where his comments are more focused on,” Tulk said. “Tapering is actually a good thing for the Canadian economy because it’s the explicit acknowledgment of a stronger U.S. economy, but it also helps to push the Canadian dollar lower.”

While Canada’s central bank hasn’t used asset purchases to fuel growth, unlike the U.K. and the U.S., the Bank of Canada has said quantitative easing is an option they would consider if needed.

‘Tool Kit’

“It’s a tool that’s in the tool kit,” Governor Stephen Poloz said Oct. 11 in Washington. “We laid that out in 2009 in the midst of the crisis under what sorts of contingencies one might have to think about those things.”

Poloz also said he and Flaherty “certainly agree that quantitative easing is one of the last things we want to be in a position to have to use.”

Flaherty has been more definitive in recent days in his opposition to the policy. At an Oct. 10 press conference in Washington, he said the U.S. should never have implemented the policy “in the first place.”

“Now that they’ve done it, they should get out of it as quickly as they can,” Flaherty said.

The comments suggest Flaherty has dropped some of the nuance he’s used in the past on the issue. He told CBC Television in a November 2010 interview that quantitative easing was an option for policy makers. In a December 2010 interview with Bloomberg, Flaherty said the U.S. has few options other than quantitative easing since President Barack Obama lacked the ability to win legislative backing for further fiscal stimulus measures.

Exit Timing

How quickly the U.S. should exit from its asset purchase program has been one of the main issues at the G-20 in recent months. Emerging market officials have expressed concern that when the Fed does begin tapering its bond buying, it could hurt them by sparking an exodus of investment, leading to higher borrowing costs. Brazil, Turkey, South Africa, India and Indonesia are the most vulnerable, Goldman Sachs Group Inc. strategists said in a Sept. 5 report.

The fact that quantitative easing could be around longer than expected may be adding to Flaherty’s frustration, said John Kirton, a political scientist and head of the G-8 Research Group at the University of Toronto.

“His remarks are certainly discrepant with the G-20 wide position,” Kirton said in a telephone interview. “Whether they are discrepant with the evolving Canada position is a more complex question.”

Controversial Position

This isn’t the first time Flaherty has taken a controversial position within the G-20. In 2012, he joined U.S. Treasury Secretary Timothy F. Geithner arguing against giving the IMF more money to help Europe deal with its debt crisis, and saying non-European countries should have a veto over the lender’s role in Europe.

He was the first G-7 minister to openly raise the possibility of Greece leaving the euro at a meeting in Marseille in 2011 and led the charge in the G-20 against European efforts to impose a global tax on banks.

Flaherty also has criticized U.S. fiscal policy. At a meeting of G-7 ministers in the U.K. in May, Flaherty said the U.S.’s push for an easing of austerity was fostering ambiguity.

Often, he’s been vindicated. The IMF admitted last September that its cooperation with European institutions over bailouts in the euro region often delayed decision making. Canada’s opposition to Europe’s bank tax efforts ended up with broad support in the G-20.

Flaherty may be more isolated on this issue, something he acknowledged last week when he told reporters that he’s “not winning” the debate.

“I am surprised that he is going as far as to say they shouldn’t have done it in the first place,” said Mark Chandler, head of fixed income research at RBC Capital Markets in Toronto. “Most people would disagree with that.”

Chisholm Pothier, a spokesman for Flaherty, said his office didn’t have anything to add to the comments in Washington.

To contact the reporter on this story: Theophilos Argitis in Ottawa at targitis@bloomberg.net

To contact the editors responsible for this story: David Scanlan at dscanlan@bloomberg.net; Chris Wellisz at cwellisz@bloomberg.net

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