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3rd UPDATE:BOC Dodge: Central Bks Move To Ease Year-End Pressures

  (Updates with more details.) 
 
   By Nirmala Menon 
   Of DOW JONES NEWSWIRES 
 

OTTAWA -(Dow Jones)- Bank of Canada Governor David Dodge said major central banks are coordinating to ease pressure on short-term money rates because they expect already high market volatility to spike further at year-end, when there is typically greater demand for liquidity.

He said markets have been "extraordinarily volatile" in the past six months due to uncertainty over the lack of transparency about asset-backed securities and other complex structured instruments.

"What we all anticipate is that the high degree of volatility we've seen in the course of the fall might even be very much greater over what for much of the world is the year-end period," Dodge said in an interview Wednesday with Dow Jones Newswires.

"And so we felt that it was incumbent on us to try to do what we could to provide as much certainty over this period that liquidity would be available."

The Bank of Canada will conduct a minimum C$3 billion (US$2.96 billion) worth of term purchase and resale agreements for which it will temporarily accept a broader range of securities as collateral.

The move is a coordinated action with the U.S. Federal Reserve, the European Central Bank, the Bank of England and the Swiss National Bank to ease tight credit conditions in financial markets. The announcement earlier Wednesday pushed equities markets higher while credit spreads narrowed.

Dodge said it's been "particularly challenging" for central bankers since July when credit markets seized up, and they've been injecting liquidity to ensure markets continue to operate reasonably.

"It certainly is not a bailout. What we're trying to do is to ensure that markets continue to function in a reasonable way. It's to no advantage to anybody that markets seize up," he said.

 
   Wider Collateral Could Be In Place By Spring 
 

Dodge has talked previously about the Bank of Canada having a facility that would provide liquidity to banks at terms longer than overnight. So the term buybacks announced earlier is akin to a test run for the Bank.

"We've been discussing with chartered banks now since the summer as to whether such a facility would actually prove helpful and it's not clear that it will," Dodge said. "But in a period of great uncertainty over year-end globally, we thought it was important to take this opportunity to try."

As for accepting collateral other than government securities, Dodge said the central bank has for a "long time" been looking at the kind of instruments it should have in its standing liquidity facility.

"That work is sufficiently far advanced that we think that by the spring, we will be in a position to expand the range," he said. The Bank is working with the government to ensure that legislation giving it authority is worded appropriately. The current wording is outdated, he said.

The Bank will by the end of March expand the list of eligible securities to include some types of Canadian dollar-denominated asset-backed commercial paper and U.S. Treasurys. ABCP backed by collateralized debt obligations and other highly-structured assets won't be considered "at this time", the Bank said.

Dodge, who retires Jan. 31, said it was good that his successor Mark Carney, a former Goldman Sachs executive, has extensive financial market experience. While the Bank of Canada has over the years given greater focus to financial market issues, it has to evolve to deal with all the "financial engineering" taking place.

"I think it's a really good thing that we have coming in as governor someone who has particular experience on that side whereas my experience has been much more on the real side of the economy," Dodge said.

 
   Term Book-Ended By Canadian Dollar Trough And Peak 
 

Canada's ABCP market remains under duress as the C$35 billion market for this short-term debt issued by non-bank issuers is locked up under terms of the Montreal Accord, a restructuring agreement forged by major market participants in August. The rescue package is scheduled to be completed by Friday.

Dodge suggested it would take longer to iron out all the details because it was an "extraordinarily complicated process".

"I guess what we are all anticipating is that there will be significant progress that has been made that will give time for further details to be hammered out going forward," he said.

Dodge said the Canadian dollar's sharp moves have been one of the key challenges during his time at the central bank. His seven-year tenure is book-ended by the Canadian dollar's lowest and highest points against the U.S. unit.

According to central bank data, the Canadian dollar closed officially at 66.94 U.S. cents Feb. 1, 2001 when Dodge became governor. On Jan. 21 the following year, the currency hit a trough of 61.79 U.S. cents.

The Canadian dollar's fortunes have since reversed and it reached parity with the U.S. unit for the first time in nearly 31 years this September and hit a modern-day high of US$1.10 Nov. 7. The currency has given up some of its gains and has been trading below parity in recent sessions.

Dodge said the highs and lows weren't in keeping with historical experience but the broad trend reflects changes in the economy.

"At both ends of the term, there have been periods where there were particular challenges when the dollar seemed to be outside of what one might have expected given what was going on in the Canadian economy and what was gonig on to relative prices," he said.

But "the general movement in the exchange rate from let's say the mid-to-upper-60s to a little over mid-90s was totally consistent with what was going on in the world with the changes in our terms of trade, with the changes in commodity prices, with the downward pressure on manufactured goods prices."

 
    Six-Month Break After Retiring 
 
    Dodge defended the Bank's policy-making process and said any suggestion it was too opaque was "bullshit". 

"I would say that our monetary policy reports and our statements are more forthcoming than statements almost anywhere else in the world," he said.

Policy decisions are made by the governing council but by law, is deemed to be made by the governor.

"Maybe the time has come to change that," Dodge said. "But I would not say that having all members of the monetary policy committee appointed by the government as is the case in the U.K. is a step forward."

"I'm not sure that one could say that the system in the ECB or the Fed leads to particular transparency or consistency or clarity about the decision-making process," he added.

As for the Bank's inflation-targeting mandate, he said there is "always room for improvement". And while using the consumer price index as the measure isn't perfect, it's one that's familiar to Canadians.

"By and large over a period of time, (it) probably provides as good as or better a reflection of inflation than any other measure we have," Dodge said.

On budget surpluses, he said it was "quite appropriate" for federal and provincial governments to run surpluses at a time when revenues have been stronger and nominal income has risen. But as for continuing to run ever-larger surpluses, "we don't think that's appropriate", he said.

Dodge said he will take a six-month break after retiring during which he plans to go sailing, spend time with his two grandchildren, visit his wife's relatives in Europe and spend three weeks in India where he will give lectures at the central bank there.

He said he hasn't thought what he will do after that because it was "absolutely inappropriate" to take time to think about the future when he's busy overseeing the Bank.

-Nirmala Menon, Dow Jones Newswires; 613-237-0668; nirmala.menon@dowjones.com

(END) Dow Jones Newswires

December 12, 2007 16:48 ET (21:48 GMT)


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