September 20, 2011 / 3:53 PM / 6 years ago

Bank of Canada sees growth

4 Min Read

<p>Bank of Canada Governor Mark Carney prepares to testify before the House of Commons finance committee on Parliament Hill in Ottawa August 19, 2011.Chris Wattie (CANADA - Tags: BUSINESS POLITICS)</p>

SAINT JOHN, New Brunswick (Reuters) - Canadian economic growth will resume this year and the European debt crisis is "fixable" with existing resources, Bank of Canada Governor Mark Carney said on Tuesday.

In an apparent bid to counter growing fears of another recession in Canada, Carney also said he does not expect a U.S. recession, although the risk of one has "clearly risen". He pledged to act to protect the Canadian recovery if needed, although he did not signal an intention to cut interest rates.

"For its part, the Bank of Canada has a wide range of tools and policy options that it will continue to deploy as appropriate," Carney said in the prepared text of his speech.

Those tools include emergency liquidity operations for banks in case of a massive external shock, he said.

Speaking as markets focus on the debt-stressed euro zone and efforts to prevent Greece from defaulting, Canada's top banker said the country is more threatened by its neighbor and top trade partner, the United States, where the economy is "close to stall speed".

Carney estimated U.S. economic growth of about 2 percent through mid-2012, compared with the bank's July forecast of around 3.25 percent in the second half of this year and in 2012-13.

His comments otherwise appeared largely the same as in the bank's last rate statement and in Carney's testimony to Parliament in mid-August.

"I don't think we are quite at the stage where they need to contemplate (interest-rate) cuts but the bank will be very flexible and see how the situation evolves to respond appropriately," said David Tulk, chief Canada macro strategist at TD Securities.

"But our view is that they would prefer to keep the policy rate lower for longer and let fiscal stimulus provide any support in the event the economy needs it."

The bank held its overnight target rate at 1 percent on September 7 and signaled it would hold interest rates steady for some time.

In a Reuters survey of Canada's 12 primary securities dealers following that rate decision, the median forecast was for a rate increase next July. <CA/POLL>

However, yields on overnight index swaps, which trade based on expectations for the policy rate, are pricing in a rate cut by March.

Before Carney spoke, the International Monetary Fund downgraded its 2011 economic growth forecast for Canada on Tuesday to 2.1 percent from 2.9 percent, and to 1.9 percent in 2012 from 2.6 percent.

The bank won't revisit its forecasts of 2.8 percent for 2011 and 2.6 percent next year until its October report.

Europe Has the Resources

Carney dedicated much of his speech and news conference to the European debt crisis, hammering home the message that the region has the resources to manage the crisis but lacks the political will.

He lined up behind the IMF's calls for a comprehensive plan to recapitalize banks.

The European Financial Stability Facility and the European Central Bank have enough resources to deal with the problem, he said.

"They have more than sufficient resources ... in the European monetary union countries to address the situation in the peripheral economies and even some of the core countries that are being put under strain," Carney said.

A repeat of the 2008 credit crisis is "unlikely," he said, because of the liquidity available in Europe.

Brazil has said it was willing to pump in $10 billion through the IMF to aid Europe, but Carney said that while such initiatives were welcome they were not necessary.

"In many respects to look to the external sources of capital, whether it's from a major reserve holder like China or from the IMF or other pools of capital ... is a question of political will to take the decision to deploy the resources that they have to address (the crisis)."

Additional reporting by Louise Egan, David Ljunggren, Andrea Hopkins, Trish Nixon and Julie Gordon; Writing by Louise Egan; editing by Peter Galloway

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