October 6, 2010G7 stakes rise on world policy divide, Canada’s Macklem says
MONTREAL — Moves by countries from Japan to Brazil to weaken currencies and loosen monetary policies underscore the growing “stakes” for the global economy and the need for policy makers to correct imbalances together, Bank of Canada Senior Deputy Governor Tiff Macklem said.
South Korea has moved in recent weeks to spur growth and weaken its currency. The Philippines, Thailand, Malaysia and India have indicated in the past two months they may seek to curb volatility, while the U.S. Federal Reserve and the Bank of England are considering more asset purchases to boost private lending. The moves prompted Brazil’s Finance Minister Guido Mantega to warn Sept. 27 of a “currency war.”
“These recent events are illustrative of the fact that the pressures for adjustment are building,” Mr. Macklem, 49, said in an interview in Montreal on Tuesday. “The stakes are getting higher.”
Group of Seven ministers, chaired by Canadian Finance Minister Jim Flaherty, will gather Oct. 8 at a dinner in Washington on the sidelines of an International Monetary Fund meeting. Mr. Flaherty said “some” finance ministers will meet tomorrow. There are no plans to issue a statement, he said.
The meetings could produce a clash of views among countries that prefer flexible exchange rates and others, such as China, which are resisting calls to allow its currency to appreciate.
U.S. Rebuffed
“What we want to see primarily is a move across the board to more flexible exchange rates,” said David Tulk, a senior macro strategist at Toronto-Dominion Bank. “You can have considerable posturing on the side of politicians and that creates a very difficult environment for businesses and even households to make decisions.”
Japanese Finance Minister Yoshihiko Noda said this week he’s ready to explain to G7 counterparts the country’s reasons for carrying out foreign-exchange intervention.
Chinese Premier Wen Jiabao also this week called for “relatively stable” exchange rates, rebuffing U.S. calls for a stronger appreciation of the yuan to trim the country’s trade surpluses.
China must allow further flexibility in its currency, Mr. Macklem said, or risk creating rapid inflation in its domestic market.
“We have seen some appreciation of the renminbi but not enough,” he said. “The Chinese real exchange rate needs to appreciate, and that adjustment will happen one way or the other.”
European Central Bank President Jean-Claude Trichet said Tuesday that China’s moves have been “not exactly what we would have hoped ourselves.”
Market Forces
The yuan has risen about 2% versus the dollar since the People’s Bank of China in June pledged greater flexibility in the currency after pegging it at about 6.83 for two years.
U.S. Treasury Secretary Timothy F. Geithner said Sept. 30 he was confident tensions over China’s currency won’t lead to escalating trade sanctions or feed into a broader global currency conflict.
The U.S. favors exchange-rate policies based on market forces, a U.S. Treasury official said Tuesday when asked about Japan’s policy toward the yen.
“It’s a struggle for all of these economies to weaken their currency,” said Mr. Tulk. “The reality is the U.S. dollar is going to remain fundamentally weak because they are the biggest player right now in terms of contemplating quantitative easing.”
‘Causing Chaos’
Fed Chairman Ben S. Bernanke and his colleagues have signaled they may announce the purchase of more Treasuries as soon as their next policy meeting on Nov. 2-3 in an effort to boost growth and cut an unemployment rate stuck near 10%.
“The irony is that the Fed is creating all this liquidity with the hope that it will revive the U.S. economy. It is doing nothing for the U.S. economy and causing chaos for the rest of the world,” Joseph Stiglitz, a Nobel Prize-winning professor at New York’s Columbia University, said Tuesday in New York. Fed, ECB Throwing World into Chaos: Stiglitz ...
Japan sold the yen last month for the first time in six years to spur exports and economic growth, joining countries across Asia and Latin America that have sought to temper gains in their currencies against the dollar.
The Bank of Japan this week cut its overnight call rate target from 0.1% and established a 5-trillion yen (US$60-billion) fund to buy government bonds and other assets. It moved following the yen’s surge to a 15-year high last month, which hurts exports and damps economic growth.
At the Bank of England, policy maker Adam Posen made the strongest call yet on Sept. 28 for the U.K. central bank to resume asset purchases after keeping its bond-buying program at 200-billion pounds (US$317-billion) for the past 11 months.
Korea Meeting
Earlier this year, the G-20 agreed to implement policies to boost demand, including promoting exchange-rate flexibility and ensuring sustainable government deficits. Mr. Macklem said that must be a focus of this year’s G-20 gatherings.
“In the meetings to come in Washington and Korea there will be considerable discussion of the full implementation of the agreements that were taken in Toronto,” Mr. Macklem said. “What we need is full implementation of that plan.”
The renewed push for easier monetary policy comes as the IMF warns growth in advanced economies is falling short of its forecasts. John Lipsky, the IMF’s No. 2 official, said on Sept. 27 that global growth in the second half of the year will fall short of the fund’s 3.75% forecast.
‘Modest Recovery’
Canada has more “flexibility” than other G7 countries because its recovery has been stronger, Mr. Macklem said. Canada ended a conditional commitment to keep its interest rate at a record low 0.25% in April, and raised it for a third time to 1% last month.
The policy rate is “very low” and aims to deal with “a significant amount of slack in the economy,” he said.
“Canada is in a different situation than the U.S. and a number of other G7 countries,” he said, adding that the country has recovered all the jobs lost in its recession.
“It’s a modest recovery and there is an unusual amount of uncertainty out there, so there are certainly challenges for monetary policy as we look ahead,” Mr. Macklem said.
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