February 24, 2012 / 3:33 PM / 5 years ago

Bank of Canada says time running out to prevent weakness

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Bank of Canada Governor Mark Carney speaks in Montreal, November 23, 2011.Christinne Muschi

NEW YORK (Reuters) - Time is running out for monetary policymakers in advanced economies to prevent long periods of weakness, Bank of Canada Governor Mark Carney said on Friday.

While downplaying concerns that new bank-capital regulations could slow the recovery of some economies, Carney said there were still significant obstacles to increasing growth, and cited economic hurdles in Europe, the United States and Japan,

"As a consequence, the advanced economies could face a prolonged period of deficient demand and weak nominal growth," said Carney, who also chairs the G20's Financial Stability Board.

"The central challenge for monetary policymakers in this environment is to prevent that from happening. The clock is ticking. The longer that crisis economies and their jobs markets remain moribund, the greater the risk of failure," he told the U.S. Monetary Policy Forum here, hosted by the University of Chicago Booth School of Business.

Carney praised the U.S. Federal Reserve for being "appropriately and effectively radical by implementing a range of powerful unconventional tools."

He said the Fed was able to use the anchor of an explicit inflation target "to boost the aggressiveness of its communications strategy.

"We expect that the Fed's elaboration of its longer-term policy goals will enhance the stimulative effect of its announcement that the federal funds rate is likely to remain at exceptionally low levels at least through late 2014."

Turning to the seven-year rollout of the so-called Basel III measures to boost bank capital levels, Carney called the overall regulatory timetable "quite enlightened, quite generous."

"In certain jurisdictions the headwinds that are coming from the requirements to build particularly capital are because the banks are capital deficient on any measure." he said.

"Yes that does create a headwind, but the solution is not to move Basel III from 2019 to sometime in the following decade."

In a separate interview with the Wall Street Journal, Carney said the "consistent strength" of the Canadian dollar "has been a concern of the bank for some time."

Over the past six years Canadian unit labor costs have risen 40 percent relative to the U.S., and Carney attributed two-thirds of that to the higher dollar, the Journal said.

In his speech, Carney reiterated that holding the Bank of Canada's key interest rate at 1 percent provides "a degree of stimulus appropriate to an environment where the Canadian economy faces considerable external headwinds."

At the same time, he repeated concerns about the high level of household debt in Canada. He said that while the government has made three "timely and prudent adjustments" to tighten mortgage rules to cool the housing sector, Canadian authorities would continue to monitor household debt levels.

Additional reporting and writing by Randall Palmer and David Ljunggren in Ottawa; editing by Peter Galloway and Jeffrey Benkoe

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