The worldwide commodity boom is here to stay, so countries had better be prepared to adjust their economic policies to deal with it over the long term, Bank of Canada Governor Mark Carney said Saturday.
In a speech at the annual meeting of the Inter-American Development Bank in Calgary, Mr. Carney told delegates that commodity price fluctuations driven by "supply shocks" or speculation are often short lived, but the one currently occurring is the result of a large, sustained boost in demand from developing countries, particularly in Asia. And that's a trend that will continue.
The rapid urbanization of countries such as India and China, and the massive increase in the middle class, means demand for energy, metals and food is going to remain high, he said. "Even though history teaches that all booms are finite, this one could go on for some time," he said.
It is not clear whether new supplies of these commodities will be enough to keep prices down, he said, so countries all over the world need to be prepared for "large and persistent changes in relative prices" that will require significant economic shifts.
"Adjustment is inevitable - and it will be substantial," Mr. Carney said.
The key, he said, is to make sure that economic policies are flexible, and to aim for price stability. This may mean shifting interest rates higher.
"It is paramount that monetary policy everywhere acts to ensure than inflation expectations remain in line with medium-term policy objectives," he said. "Everything else being equal, higher commodity prices usually necessitate higher policy interest rates."
Mr. Carney also argued that countries should not try to interfere with the flow of capital, which is seeing large amounts of private money moving into emerging economies. In fact, a "sustainable and effective" flow of private capital should be promoted, he said, because it "facilitates economic growth and prosperity through the efficient allocation of resources, specialization in production, and diversification of risk."
Exchange rates should be flexible and unilateral intervention should be avoided, he said, except in special circumstances. He defended occasional multilateral intervention, such as the move by the G7 countries recently to stop the volatility in the Japanese yen.
In that case, "the circumstances were clearly exceptional: movements in the yen had become disorderly, volatility was excessive, and there were potential adverse implications for economic and financial stability," he said.