UPDATE 2-Bank of Canada sees progress in G20 currency talks

* Says G20 will make progress on currencies eventually

* Says understands China’s position on currency

* Cuts forecasts for growth in 2010 and 2011
(Adds details)

By David Ljunggren and John McCrank

OTTAWA, Oct 20 (BestGrowthStock) – The Bank of Canada expressed
optimism on Wednesday that G20 nations would eventually make
progress in talks to defuse global currency tensions and it
also had sympathetic words for China, which is under huge
pressure to let the yuan float.

Finance ministers from the Group of 20 meet in South Korea
this weekend amid increasing fears of a trade war in which
countries would devalue their currencies to boost exports.

Bank of Canada Governor Mark Carney said that if
mishandled, stress over currencies could undermine an already
patchy global recovery.

“It may not look like we’re actually making progress
because we’re getting down into the real policy decisions,” he
told a news conference after the release of the central bank’s
latest Monetary Policy Report.

“This discussion, which is spilling over more into the
public domain, on exchange rates is getting more tangible as
well. I think we just have to be more relentless on this,
constructive in the room, and we will ultimately, we should
ultimately, make progress,” he said.

The United States, which has taken a hard line on the
issue, said on Wednesday it wanted the G20 ministers to commit
to allowing market forces to set currency values.

There is no sign yet the G20 will come to an agreement at
the weekend talks. Washington and others, including the
Canadian government, are unhappy about China’s policy of only
letting the yuan currency appreciate very gradually.

Carney took a softer line than Canadian Finance Minister
Jim Flaherty when asked about China and currencies.

“We understand the reasons for China’s position, we
understand the difficulty of movement, we understand the
importance of a degree of gradualism in the movement,” he
said.

“But as part of rebalancing the global economy, increased
flexibility of the (yuan) is absolutely essential and we’re
working with our partners to ensure — including China — that
that is the case.”

Earlier this month Flaherty said that “to have some
countries noncooperatively, artificially creating export
subsidies for themselves by holding down the value of their
currencies” was dangerous in the longer term.

Benjamin Reitzes, an economist at BMO Capital Markets, said
he thought Carney “sees Canada playing a role toward pushing
others to where we are and to rely on their currencies to be
more market based”.

Brazil imposed tax measures this week to try to push down
the value of its currency, while Japan intervened in foreign
exchange markets last month to curb gains in the yen.

“Canada’s going to try to play a leadership role among the
G20 and try to get them — China, Japan, Brazil — to allow
their currencies to float essentially, to be more market-based,
instead of being determined by the government and
policymakers,” Reitzes said.

In the policy report, the Bank of Canada said it would have
to consider any further interest rate hikes carefully, given
the patchy global recovery, a weak U.S. outlook and expected
curbs on Canadian growth.

The bank, which held its key rate steady at 1.0 percent on
Tuesday after three consecutive increases, said the recovery
would be weaker than it thought in July. It cut its quarterly
economic growth forecasts until the fourth quarter of 2011.

Carney also said that the Bank of Canada may have some room
under its current inflation-targeting mandate to tackle asset
bubbles. Some analysts fear an extended period of low interest
rates could cause future bubbles.

“We have a very clear mandate which is an inflation
targeting mandate. We will manage monetary policy to achieve
the inflation target. We don’t do mandate creep,” he said.

“There is some flexibility in terms of achieving the
inflation target horizon, I would say under the current
mandate, that would take into account asset price bubbles if
appropriate.”
(Additional reporting by Jennifer Kwan in Toronto; editing by
Peter Galloway and Jeffrey Hodgson)

UPDATE 2-Bank of Canada sees progress in G20 currency talks