SAO PAULO (Reuters) - Exchange rate inflexibility between China and the United States is a source of upward currency pressure in Canada and Brazil, and the two countries should work through the G20 to promote currency adjustments, the Bank of Canada’s No. 2 policymaker said in Sao Paulo on Monday.
“At the root of it, you’ve got the two biggest economies in the world, the United States and China, and there’s not enough exchange rate flexibility between the two,” Bank of Canada Senior Deputy Governor Tiff Macklem said following a speech to the Brazil-Canada Chamber of Commerce.
Macklem said that limited flexibility in China was “thwarting” the effect of monetary stimulus in the United States and fuelling inflation in China. He said that two results of this were insufficient global demand and “persistent upward pressure” on Brazil and Canada’s currencies.
Macklem said Brazil and Canada should address the issue through G20 talks to promote currency adjustments. Macklem praised Brazil for having brought “considerable attention, rightfully so, to the difficulties we’re seeing globally in currency adjustments.”
Blaming loose monetary policy in developed economies for the heavy flow of foreign cash into her country, Brazilian President Dilma Rousseff - a left-wing militant turned technocrat - on Monday extended the scope of a 6 percent tax on foreign borrowing. Strong capital inflows have boosted Brazil’s currency and hurt industrial competitiveness.
In a speech that defended the pro-market focus of a capitalist system, Macklem applauded Brazil’s policies and its record on reducing the gap between rich and poor.
He acknowledged that the global financial crisis had hit the poor hardest and had increased inequality in many countries. But Macklem said movements like Occupy Wall Street were wrong to think the remedy was abandoning market-based economics.
“From the supporters of the Occupy Wall Street movement to the editors at the Financial Times, the market economy is under acute scrutiny,” he told the Brazil-Canada Chamber of Commerce.
“The economic record of our countries (Canada and Brazil) in recent years provides an important counter-example to those questioning capitalism,” Macklem said. “Markets work better than anything else. They have proven over time to be the best generator of prosperity.”
Macklem said countries needed a correct policy framework, while central bankers needed to ensure prices and financial markets remain stable.
He noted that Brazilian policies that had helped lift people out of poverty went beyond social programs and included a move to inflation targeting, a flexible exchange rate and fiscal reforms.
Additional reporting By Louise Egan in Ottawa; editing by Janet Guttsman and Andrew Hay