OTTAWA — The Bank of Canada will adjust its monetary policy in the coming months to reflect the growing risk of a global economic slowdown, central bank Governor David Dodge said Saturday.
His comments underscored the growing belief among economists that the Bank of Canada will move to reduce interest rates in the coming months as it copes with a sharply higher loonie and slowing growth in the United States.
In a conference call from a meeting of Group of 20 countries in the South African resort town of Kleinmond, Mr. Dodge said global finance ministers and central bankers are increasingly concerned about growing turbulence in financial and currency markets, and its impact on growth.
“Downside risks to world growth have increased since we met a month ago” at the International Monetary Fund in Washington, Mr. Dodge said.
“And it's quite clear that global financial turbulence that we were experiencing then is now going to be more prolonged and the volatility is likely to be higher for longer than we anticipated when we met at the IMF last month.”
Mr. Dodge added that the Bank of Canada would have to respond to those increased economic risks when pursuing its own policies, which include the setting of trendsetting interest rates.
The bank governor and Finance Minister Jim Flaherty said they took the opportunity at the meeting to urge China to increase the value of its currency and expand domestic consumption in order to help global market adjust to the declining U.S. dollar and weaker growth in the United States.
Mr. Flaherty said he emphasized Canada's concern about the rapid rise of the Canadian dollar and the fact that other countries, notably China, are not participating in the international adjustment because they have fixed exchange rates.
“I underscored our concern that Canada has been disproportionately affected by the impact of global imbalances on international currency markets,” he said.
He said Canada has borne “an enormous share of the burden” of U.S. adjustment, he said, adding that the manufacturing and forestry sectors have been particularly hard hit by the elevated loonie.
“China and a number of other Asian countries need to do more, and need to expand their domestic demand to offset [weaker] demand in the United States,” the Finance Minister said.
While the Minister and bank governor have been urging China to boost the value of its currency for months, they said Saturday that other countries expressed their concerns at the G20 meeting. The European Union, Brazil, South Africa and Australia have all seen their currencies rise sharply against the U.S. dollar – and against the Asian currencies that are pegged to the greenback.
As a result, both American and Chinese imports are cheaper in those countries, while their own exports are more expensive in markets that are aligned with the U.S. dollar.
Mr. Dodge said the devaluation of the yuan against other major currencies has contributed to an inflationary problem in the rapidly growing Chinese economy. As a result, Beijing may have domestic reasons to re-value its currency.
“Inflation is a huge political as well as economic problem for them,” he said, adding the governor of China's central bank spoke on the inflationary threat at yesterday's G20 meeting.
© The Globe and Mail
