Ignore market signals at your peril: Bank of Canada

Wed Dec 12, 2007 4:50pm EST
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By Louise Egan and Randall Palmer

OTTAWA (Reuters) - While still dealing with one economic crisis, Bank of Canada Governor David Dodge warned in an interview with Reuters on Wednesday of the need to heed market signals to avoid another.

Dodge, reflecting on his seven years at the helm of Canada's central bank, said that if necessary market adjustments are not made on a timely basis then the pain from forced adjustments later will be much greater.

He suggested this year's liquidity crisis in money markets could have been less severe if central banks had raised interest rates earlier to counter the easy credit stemming from growth in asset-backed securities markets and in the U.S. subprime mortgage market.

Dodge also cited the need to reduce global economic imbalances, particularly between Asian nations and major Arab oil exporters on the one hand and the United States on the other.

"There is more of a correction to come," Dodge said of the U.S. dollar. "The main correction has got to be from across the Pacific."

For much of his tenure, which ends at the end of January, he has argued that it was not sustainable for the United States to be "a consumer of last resort globally" and run persistently high current account deficits.

The Canadian economy is heavily dependent on U.S. demand but far from being alarmed by the prospects of lower U.S. growth, Dodge said it was necessary.

"The fact that demand in the U.S. is slowing is actually generally helpful. Now, what you always hope is that it slows in a rather smooth way and doesn't fall off a cliff," the pipe-smoking governor said.   Continued...

<p>Bank of Canada Governor David Dodge pauses during an interview at the bank's headquarters in Ottawa December 12, 2007. REUETRS/Chris Wattie</p>