Bank of Canada wary of commodity market reform

The Bank of Canada warned Thursday against hasty reform of commodity markets, carving out its position for a G20 meeting in France where officials will discuss curbs on commodity speculators.

John Murray, a deputy governor at the central bank, said before tightening regulations world leaders should first determine how much of commodity price moves are caused by speculative trading and whether there is a market failure or serious economic harm.

French President Nicolas Sarkozy, who is chairing the G20 this year, has put reform of the commodity derivatives market near the top of the group’s agenda. Finance ministers and central bank governors from the 20 large advanced and emerging economies will meet in Paris next week.

“Policymakers determined to take corrective action should therefore proceed with caution. Without a clear diagnosis it is difficult to talk about remedies and policy fixes with any confidence,” Murray said.

Even Sarkozy has called for a more thorough review before taking action, Murray noted.

The rally in oil prices has caused concern in consuming countries about the impact on inflation and economic growth.

Spiraling food prices, which helped spark deadly riots that brought down the ruling regime in Tunisia, also weigh on policy makers’ minds as they prepare to meet.

Major exporter

Canada has a big stake in this debate as the only member of the advanced G7 economies that is also a major commodity exporter. Natural resources production represents about 11 per cent of its gross domestic product and one third of exports. The Alberta oil sands are home to the largest deposits outside Saudi Arabia.

High commodity prices have boosted incomes in Canada and its currency, without lifting inflation to levels that would seriously concern the central bank.

Murray said available evidence suggests most of the major commodity price swings as well as short-term volatility are driven by market fundamentals.

“If these movements are predominantly fundamental in nature, attempts to resist them would be largely futile and counterproductive,” he said.

Sarkozy has floated numerous proposals for regulating commodity markets. They include limiting positions investors can take, self-identification as a “speculative” or “commercial” market player and regulating over-the-counter trades.

The European Union’s executive has announced plans for new controls on commodity trading and in the United States, financial reform has proposed limits be put on speculative trading in some commodities.

Imposing limits on allowable contracts or tightening margin requirements could “handicap” markets, Murray said. Limits on commodity prices could result in reduced supply.

“If anything of this sort is contemplated, it should be done cautiously,” he said.

Murray sees a consensus, however, on less controversial reforms such as improved transparency in markets and structural reforms to make economies more resilient to shocks and changing market conditions.

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