December 5, 2007 / 11:09 PM / 10 years ago

Next Bank of Canada chief touts forex flexibility

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.

<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>

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.

Carney said intervention remains an option for the central bank but that it should be a “rarity.” The bank has not intervened since 1998.

<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>

“History teaches us that intervention without other actions does not work ... it just gives money to speculators, in my opinion,” he added, but did not give details.

POLITICAL PRESSURE

His testimony came a day after the Bank of Canada cut its overnight rate by one-quarter point to 4.25 percent, taking some of the political pressure off the bank to rein in the currency and provide relief for beleaguered manufacturers and exporters.

Carney, 42, ardently defended the Bank of Canada’s inflation target at the midpoint of a range of 2 percent to 3 percent and cautioned against any rash changes to that target, which he said could create uncertainty in markets and the overall economy.

Inflationary booms always end badly and require great effort to overcome, he said, and agreed with one legislator who suggested that keeping inflation low helped avoid recession.

Those who know Carney say he is likely to want to impose his own stamp on the Bank of Canada rather than aim to emulate his predecessor. But he appeared on Wednesday to want to build on Dodge’s legacy of improving communications and transparency at the bank, saying he would like to study the possibility of publishing the minutes of monetary policy meetings.

In response to liquidity problems stemming from the global credit crunch, Carney said the bank was looking at options to see if it can provide term liquidity to the markets, which would give it the flexibility that central banks in Europe and the United States have.

Carney played a key role in liaising with the private sector during the August credit crunch, which seized up one corner of Canada’s asset-backed commercial paper market.

($1=$1.01 Canadian)

Reporting by Louise Egan; Editing by Rob Wilson

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