Bloomberg News

Macklem Says Lack of China FX Flexibility Thwarting U.S. Stimulus Measures

March 12, 2012

Efforts by U.S. policy makers to stimulate the economy are being thwarted by a lack of flexibility in the Chinese exchange rate, Bank of Canada Senior Deputy Governor Tiff Macklem said.

The U.S. “needed considerable monetary stimulus to re- start their economy,” Macklem said in response to audience questions following a speech in Sao Paulo, pointing to “a very limited exchange-rate flexibility with China that is thwarting the effectiveness of that stimulus. On the other side, it is fueling inflation in China.”

Macklem was speaking in Brazil, where Finance Minister Guido Mantega has said that his country is being hurt by a global “currency war.” Brazil today extended a 6 percent tax on foreign loans and bonds issued abroad by local companies to include lending with a duration as long as five years, the third measure taken this month to weaken the real.

Brazil’s actions have “brought considerable attention” to the “difficulties we are seeing globally in currency adjustment,” Macklem said. “The reality is that the international monetary system is not working the way it should be working.”

Canada is facing many of the same global “headwinds” as Brazil, Macklem said, including weakness in exports linked to a strong currency.

Countries such as Brazil and Canada are “dealing with the consequences” of the lack of Chinese flexibility, Macklem said, citing “insufficient global demand” and “persistent upward pressure on their currencies.”

More Adjustment Needed

“What needs to happen is we need to see more adjustment between the currencies of the two biggest countries,” Macklem said.

China has allowed the yuan to fall 0.5 percent this year after a 4.7 percent advance in 2011 as its economic growth slowed in the first two months of the year. The currency is allowed to move 0.5 percent either side of the daily fixing.

“We need to work together to help other countries take the difficult decisions that they need to promote adjustment, to reduce global vulnerabilities and to help sustain the recovery,” Macklem said, referring to the Group of 20 countries, of which Canada and Brazil are both members.

Referring to Canada’s economy, Macklem said household spending needs to slow after an increase that was spurred by rising debt levels.

“We have increasingly stretched households that is increasing the vulnerability of the household sector, so household spending needs to moderate,” Macklem said.

In his speech, Macklem said that while markets have proven to be the best way to generate prosperity, they need to be guided by strong policy frameworks. Inflation control and well- regulated financial systems can help encourage growth, he said, adding that low inflation does not guarantee financial stability.

To contact the reporter on this story: Matthew Bristow in Sao Paulo at

To contact the editor responsible for this story: Chris Wellisz at

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