UPDATE 2-Bank of Canada's Wilkins: Economy still below potential

Tue Feb 10, 2015 3:18pm EST
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(Adds background, market reaction, analyst comments)

By Leah Schnurr and David Ljunggren

OTTAWA Feb 10 (Reuters) - The Canadian economy is still operating below its potential, a senior Bank of Canada official said on Tuesday, pointing to slack in the labor market and calling the recent sharp drop in oil prices a "setback."

In some of the first remarks by a Bank of Canada policymaker since a shock interest rate cut last month, Senior Deputy Governor Carolyn Wilkins laid out the reasons for the surprise move, reiterating that the bank thought it would take too long to close the output gap if it did not act.

Wilkins said measures of slack in the labor market were showing greater unused capacity than broader economic measures.

"There is no doubt that the Canadian economy has room to grow," Wilkins said in a speech.

Still, Wilkins expressed confidence that with a stronger U.S. economy, a lower Canadian dollar and an accommodative monetary policy, the Canadian recovery was on track.

"We'll get there and it will be a very good thing for Canada," she said.

Wilkins said the bank has the tools to bring inflation back to target if potential output growth turns out to be lower than anticipated, though she refrained from suggesting which way rates might move in the near term.   Continued...