Next Bank of Canada chief touts forex flexibility

Wed Dec 5, 2007 6:33pm EST
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By Louise Egan

OTTAWA (Reuters) - Singing from the same song sheet as current bank officials, the next governor of the Bank of Canada insisted on Wednesday that the Canadian dollar must move freely against other currencies and touted low inflation as a recipe against recession.

Mark Carney, who succeeds David Dodge as central bank chief on February 1, told a parliamentary finance committee that the Bank of Canada takes currency movements such as the recent sharp appreciation of the Canadian dollar into account when setting monetary policy.

But he said it would be a mistake to try to avoid future volatility by fixing the currency to the U.S. dollar and that central bank intervention in the foreign exchange market should be reserved only for extreme circumstances.

"It is not surprising that some have called for Canada to fix its currency to the U.S. dollar. In my opinion, it would be a mistake to do so," Carney said in his opening remarks.

He added: "With a fixed exchange rate, the adjustments would have to come through movements in overall output and in all wages and prices...."

"I stress that this position does not mean that the bank is indifferent to movements in exchange rate."

The Canadian dollar rose past parity with the U.S. dollar in September and hit a modern-day high of US$1.10 on November 7 before backtracking. It closed Tuesday's North American session at 99.49 U.S. cents.

Carney, a former Goldman Sachs investment banker, appeared calm and unruffled as he fielded questions from legislators, primarily on how he would respond as governor to the sharp swings in the Canadian dollar's value against the greenback.   Continued...

<p>Incoming Bank of Canada governor Mark Carney arrives to testify before the Commons finance committee on Parliament Hill in Ottawa December 5, 2007. REUTERS/Chris Wattie</p>