Bank of Canada pushes exit strategies, flexible FX

OTTAWA (Reuters) - Bank of Canada Governor Mark Carney pledged on Thursday to stay the course on monetary policy and said it was important for countries to have valid stimulus exit strategies as well as flexible exchange rates.

He repeated past language that he expects to keep the target interest rate at 0.25 percent through mid-2010, that he retains the flexibility to engage in quantitative easing, and that the recent sharp rise in the Canadian dollar could fully offset recent positive developments in the Canadian economy.

In the prepared text of a speech he was giving in Montreal, he said too much fiscal stimulus by countries could be self-defeating if it leads to higher interest rates or reduces spending by consumers worried about tax hikes.

“It is therefore paramount that fiscal policy frameworks retain credibility. This requires both effective current initiatives and realistic exit strategies,” he said, praising Canada’s doing better than fiscal plans in the 1990s on the road to budgetary balance.

In remarks that appeared directed at least partly at China, he said countries must adopt coherent macro policies and allow “real exchange rates to adjust to achieve external balance over time...Given the current, deeply synchronous global recession, the costs of free riding should be obvious to all.”

He also said global demand and trade levels appeared to be approaching bottom, and inventory and labor adjustments had already been substantial, but unemployment would likely rise further across the Group of Seven leading industrial powers.

Reporting by Randall Palmer; editing by David Ljunggren