Bank of Canada says economy hit by credit woes

OTTAWA (Reuters) - Canada's economy is beginning to feel the spillover effects of the global credit market turmoil but its financial institutions remain relatively healthy compared with those in other countries, Bank of Canada Governor Mark Carney said on Thursday.

Carney said the central bank's injections of cash into money markets have succeeded in bringing the key overnight interest rate close to its target, which now stands at 3.5 percent. Conditions in term money markets have improved since December but are still not back to historical norms, he said in a speech to be delivered in Toronto.

He made no comment on the outlook for monetary policy in Canada but said that in times of volatility, it becomes more important than ever that the bank maintain a low, stable and predictable inflation rate.

"Canada is not isolated from global events," Carney said in his second speech as governor.

"Some of our institutions have suffered losses, and our economy is beginning to feel the effects of the deterioration in global financial conditions," he said.

In trying to repair stressed money markets, Carney said global policymakers should focus on addressing the three underlying problems that caused the disruption -- lack of liquidity, lack of transparency of structured credit products and misaligned incentives that encouraged excessive risk-taking.

However, he said officials can afford to take some time before taking additional action because "many of the market practices that contributed to the dislocations have stopped."

He warned against overly prescriptive solutions from authorities, saying market participants have many reasons to improve their own standards.

In fact, he noted "encouraging signs" that market players have learned the lessons from the global turmoil stemming from the collapse of the U.S. subprime mortgage sector.