UPDATE 1-BoC's Murray-Exiting easy-money policies will boost volatility

Tue Nov 5, 2013 4:30pm EST
 
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By Ann Saphir

SAN FRANCISCO Nov 5 (Reuters) - As central banks in advanced economies exit from extraordinarily easy monetary policies, there will be increased periods of market volatility, a top Bank of Canada official said on Tuesday.

But if emerging markets are tempted to respond by tightening capital and currency controls, they should understand that their own incentives and those in advanced economies are well-aligned, Bank of Canada Deputy Governor John Murray said at the San Francisco Fed's Asia Economic Policy Conference.

"No one would want the advanced economies to exit too early or too late, and no one benefits from excessive market turbulence," Murray said. "There will be some episodes of increased volatility, but advanced economies are committed to being as transparent as possible to minimize surprises and smooth the adjustment."

The Bank of Canada last month held its policy rate at 1 percent, and dropped a reference to future interest rate hikes in a signal that its next move could just as easily be a cut to interest rates as an increase.

Economic growth in Canada has been slower than expected, and inflation is lower than the central bank wants.

While financial stability risks stemming from low rates remain a concern, Murray suggested on Tuesday that the central bank is seeing some signs of those risks abating.

"House prices are stretched in Canada ... they no doubt have risen to quite high levels, as has the level of household debt," he said in answer to an audience question about a potential housing bubble in Canada.

But a recent sharp deceleration in household credit is among "encouraging signs with regard to what you might call a growing domestic imbalance in Canada," he said. "We do see things moving it the right direction."