October 28, 2009 / 10:52 PM / in 8 years

Bank of Canada says China FX policy "great risk"

OTTAWA (Reuters) - China’s foreign exchange policy poses a great risk and it is a top priority of global policy makers to work toward a change, Bank of Canada Governor Mark Carney said on Wednesday.

<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>

“They are running a great risk with this policy. It is a cause of some of the imbalances in the global economy. It is a contributing factor to some of the vulnerabilities that have existed and were realized,” Carney told a Senate committee.

“It is a top priority I think for all policy makers to work with the Chinese and develop a suite of policies across all major economies, including China, that are consistent with moving off of this policy.”

The Chinese yuan has been virtually repegged against the dollar since mid-2008, contributing to the further buildup of the country’s massive foreign exchange reserves.

Making his second appearance before a parliamentary committee this week, Carney repeated the central bank’s view that the possibility of intervening on foreign exchange markets should be seen in the context of achieving the central bank’s 2 percent inflation target.

“We should only use our tools that we have, which include foreign exchange intervention, in a manner that is consistent with achieving the inflation target. And that would be the objective of any policy action that we would take,” he said.

Carney also repeated that the central bank does not target a specific rate for the Canadian dollar and has options, including credit and quantitative easing, if it feels further easing is needed after cutting interest rates to a record low.

He said the Bank of Canada believes it is worth studying further the possibility of switching from its current inflation target to one of targeting price levels.

The distinction is a fine one, but under price-level targeting the bank would aim for a specific numeric value in the consumer price index and would try to reverse any past deviation from that target.

If the target were overshot, this would mean temporarily tighter monetary policy than otherwise would have been warranted.

Under the central bank’s current policy, which expires at the end of 2011, it tries to keep inflation at 2 percent and ignores any past deviations.

“It’s too early to come to any conclusions. I would say the price-level targeting research merits continued focus,” Carney told the Senate committee.

He would not say whether the bank thought it was useful, if inflation targeting were retained, to lower the target from 2 percent.

Writing by Jeffrey Hodgson; Editing by Leslie Adler

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