CALGARY - Bank of Canada governor Mark Carney has signalled he will move cautiously on future interest rate hikes, given the growing and difficult challenges facing the world's economic system.
In a speech full of red flags for the world's recovery, Carney told international business leaders in Calgary on Friday that the world is in need of major reforms and that adjustments will be wrenching.
"The fact is we're three years in to the global financial crisis and its dynamics still dominate the economic outlook," Carney told the forum.
"In particular, broad forces of bank, household and sovereignty leveraging can be expected to add to the variability and temper the pace of global economic growth in the years ahead," he said.
In addition, he made it clear that he was concerned about the weak U.S. economy, noting it could have "important implications" for Canada's future growth.
"In this environment, the bank will have to chart a careful course for Canadian monetary policy," he said.
"Any further reduction in monetary policy stimulus would need to be carefully considered in light of the unusual uncertainty surrounding the outlook," he added, repeating the same language he used Tuesday when he hiked the bank's overnight rate a further quarter point to one per cent.
It was the third successive rate hike since June and put the Canadian central bank alone among the Group of Seven economies on a path of withdrawing monetary stimulus.
The address, part of a panel discussion focusing on the upcoming G20 summit in South Korea, was as gloomy as Carney has been in some time about the difficulties facing the global economic and financial systems and efforts to address them.
"The question is whether to change the system or to change policies to be consistent with the current system. There's no miracle cure,"said Carney.
"Faith is required but not in some barbarous relic like gold or utopian global central bank. Rather countries must restore their faith in the adjustment process under the current international monetary system."
Carney said both the International Monetary Fund and G7 institutions have proven wanting and the jury is still out on the new, bigger G20 process.
He was especially critical of emerging economies such as China, which have yet to make adjustments to exchange rates needed to address global imbalances. Most of the adjustments made so far, he said, have come from advanced economies in efforts to rein in spending.
"Measures that have actually been implemented have been consistent with the deflation path. While the ... right promises have been made, conviction is required," he said.
"Without the successful completion of the G20 reforms, the current recovery is at risk."
Adjusting the current forces at work in the global economy requires completing global bank reforms, making progress in getting China and other emerging economies to move to more flexible exchange rates, addressing global imbalances and other structural changes to global systems.
He noted that the Bank of Canada pegged the potential difference between the co-operative path among the G20 countries and not working together at $7 trillion by 2015.
Even so, he said making the right adjustments won't be easy or painless, nor is assured that the G20 is up to the task.
"Time will tell whether the G20 nations can better the underwhelming track record of the G7 in co-ordinating policies," he said.
Paul Volcker, former chairman of the U.S. Federal Reserve and current chairman of President Barack Obama's Economic Recovery Advisory Board, was equally gloomy.
"I think it is fair to say that we will not reach, in the United States, peak levels of production for several years even on a reasonably optimistic trajectory," Volcker said.
"We have a financial situation in the United States that's still operating on maybe two cylinders, but it's not operating on six cylinders," he said.
Volcker was also concerned about the strength of emerging economies such as China, India and a number of Latin American countries. Such countries are exhibiting a "remarkable rate of recovery," becoming investors in and lending money to the traditionally wealthier states, he said.
"Not only are they expanding very fast but we have a phenomena that is not seen or written about in economic textbooks," he said.
"That tells you there is something really rather seriously wrong and imbalanced in the world economy. We have been for some time in an unsustainable economic pattern."
Volcker said Europe is suffering from many of the same problems as the United States and will need "years and not months" to recover.
"They are showing the same symptoms that we have had in the United States with the risk that puts the stability of the euro itself in some jeopardy."
