October 27, 2009 / 6:59 PM / in 8 years

Bank of Canada says on right policy track

OTTAWA (Reuters) - The Bank of Canada thinks its policy stance as of now is just right, Governor Mark Carney said on Tuesday, signaling he did not expect to have to take special steps to tame the Canadian dollar and boost recovery.

<p>Bank of Canada Governor Mark Carney (R) prepares to testify before the Commons finance committee with Senior Deputy Governor Paul Jenkins on Parliament Hill in Ottawa, October 27, 2009. REUTERS/Chris Wattie</p>

He told a parliamentary committee that the central bank still retained the option of intervening directly in the foreign exchange market or of using “unconventional measures” including quantitative easing, effectively printing money.

“We certainly retain all those other options and would underscore our determination to use those options if we think the situation required it in order to achieve the inflation target, but we would only use it to the extent that they were required to achieve the inflation target,” Carney said.

The Bank of Canada sets policy to try to have inflation at 2 percent, and only takes a strong currency into account to the extent that it would dampen demand so much that inflation would fall short of the target.

“Our current expectation, just to underscore for members of the committee, we think that policy is set appropriately to achieve that target -- staying at 0.25 percent (for the overnight interest rate),” he said.

“We expect to stay there through the end of June 2010 on current outlook for the global and Canadian economies,” he said.

Finance Minister Jim Flaherty also said on Monday that while quantitative easing was an option it was not a magic remedy and would only have a limited effect.

Carney faced numerous questions about what would happen if the currency reached parity with the U.S. dollar. It is currently around C$1.0660 to the U.S. dollar, or 93.81 U.S. cents. The bank’s policy states it could use foreign exchange intervention “if extreme currency movements seriously threatened the conditions that support sustainable long-term growth of the Canadian economy.”

But Carney downplayed the effectiveness of such a move.

“History has shown that intervention in and of itself, without backing policy moves, or policy moves that are consistent with the direction of that intervention, seldom is effective over the longer term,” he said.

He said that though Canadian growth only resumed in the third quarter, later than some fellow members of the Group of Seven leading industrialized nations, he expected it would be the first to return to full capacity.

He also said that while the ratio of debt to gross domestic product -- a measure of the ability of a country to service its debt -- was rising during the economic crisis, Canada would maintain the lowest ratio in the G7.

Carney also stressed the importance of changing international financial structures so that major banks or insurance companies could be allowed to go bankrupt without bringing down the whole system.

He said other countries in the Group of 20 leading industrialized and emerging nations were increasingly speaking of the importance of reforms, which would include raising bank capital and establishing clearing houses designed to survive bank failures.

The governor also gave a strong rebuttal to the idea of fixing Canada’s exchange rate with the United States. And he said the U.S. dollar would remain “the reserve currency of choice.”

Editing by Rob Wilson

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