Outlook less scary for Canada: BoC's Carney

Mon Apr 2, 2012 4:06pm EDT
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By Jennifer Kwan

WATERLOO, Ontario (Reuters) - Canada's economy is doing better than expected and the threat from the European debt crisis has lessened, Bank of Canada Governor Mark Carney said on Monday, while warning that high household debt levels are unsustainable.

The speech largely echoed a more upbeat tone in the bank's March 8 statement and suggests the bank is inching toward an interest rate hike, although possibly not until next year.

"Conditions in the Canadian economy have...been somewhat stronger and the degree of slack somewhat smaller than the bank had expected," the central bank chief said in a speech to a business audience in Kitchener-Waterloo, Ontario.

He said the bank's monetary policy decisions would take into account the stronger growth profile, firmer-than-expected inflation, fiscal restraint recently announced by federal and provincial governments as well as households' dependence on debt financing, which he continues to see as the biggest domestic risk to the economy.

"The bank will take whatever action is appropriate to achieve the 2 percent CPI inflation target over the medium term," he said.

The bank's next interest rate decision will be announced on April 17. Market players expect the bank to maintain the overnight lending target at an extremely low 1 percent, and primary securities dealers surveyed by Reuters on March 23 expected the bank to hold rates steady until the third quarter of 2013.

The Bank of Canada became the first central bank in the Group of Seven advanced economies to raise borrowing costs after the global financial crisis. But it has held the rate at 1 percent since September 2010, awaiting signs that the U.S. economy is reviving and the European debt crisis is under control.

Carney now sees the European problems as "chronic" rather than "acute" and noted "encouraging" U.S. data, a view that could favor monetary tightening.   Continued...