Lane Says Monetary Easing Benefit Outweighs Currency Risk

Bank of Canada Deputy Governor Timothy Lane said the easy monetary policy of central banks in the U.S., Europe and Japan is boosting global demand and more than offsets the impact of currency swings in other countries.

“Expansionary monetary policy to support domestic objectives in post-crisis economies can put upward pressure on other countries’ currencies,” Lane said in the text of a slide show presentation he’s giving today at the Bank of Korea in Seoul. “On balance, however, exceptional easing in post-crisis economies is likely to be beneficial to other countries that were not at the center of the crisis, since the favorable effects of stronger growth in the major post-crisis economies outweigh the adverse effects of currency appreciation.”

The currencies of the U.S. and Japan, the world’s largest and third-largest economies, are being weakened by central bank policies of purchasing assets to boost growth. The U.S. Federal Reserve is buying $85 billion of Treasury and mortgage bonds each month and the Bank of Japan has doubled monthly bond purchases this year.

Lane’s remarks echo past Bank of Canada comments that the actions of the Bank of Japan and the Fed should boost Canadian exports growth even as they support the country’s dollar.

The Bank of Canada has kept its benchmark rate at 1 percent since September 2010 in part because of a sluggish export recovery, and Lane today didn’t comment when borrowing costs may change.

Canada and other “non-crisis countries” have relied on domestic spending instead of exports as monetary policy has eased, Lane said. Canada is showing “a constructive evolution” in household finances after “imbalances” built up, he said, a reference to consumer debt that’s reached a record 165 percent of disposable income.

The global economy is at risk if there isn’t a shift where countries with large savings boost domestic demand and indebted nations cut back, Lane said. Without a quick adjustment that also includes exchange rates, the global economy may lose $6 trillion in output, he said.

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