March 5, 2009 / 4:48 PM / in 9 years

Bank of Canada urges rapid action on stimulus

OTTAWA (Reuters) - The Bank of Canada stressed on Thursday the urgency of fiscal action to stimulate spending and ease credit as a string of bad economic news batters consumer and business confidence.

<p>The Bank of Canada building is pictured in Ottawa March 3, 2009. REUTERS/Chris Wattie</p>

Pierre Duguay, deputy governor at the central bank, clung to the bank’s prediction of a sharp recovery leading to 3.8 percent growth in 2010 -- a forecast many private sector economists see as too rosy.

In testimony to a parliamentary finance committee, Duguay said he saw little risk that stimulus plans posed a threat to inflation or would lead to perpetual budget deficits in the long term.

More bad economic data is due in coming months, he said, making it all the more crucial that the Conservative government’s C$40 billion economic recovery plan is rolled out quickly.

“I agree there is a sense of urgency. Very clearly we will be hit by a string of bad news in the coming months,” Duguay said.

“What is absolutely critical is to maintain business and public confidence and, clearly, access to credit is essential in that situation,” he added.

The Bank of Canada has injected liquidity into money markets but Ottawa’s budget plan -- which contains the stimulus measures -- also contains measures to improve lending.

The budget legislation should become law shortly, after being passed by the House of Commons late Wednesday, Finance Minister Jim Flaherty said on Thursday.

“(The bill) is in the Senate now. I‘m encouraged from what I’ve heard in the last 24 hours that the Senate may deal with it expeditiously. I‘m hopeful that will happen,” he said in televised remarks from Washington after a meeting with White House economic aide Larry Summers.

The stimulus package aims to ramp up infrastructure spending, create new tax breaks and increase the borrowing authority of public entities to fill gaps in the business credit market.

Opposition parties are likely to pass the bill but the main opposition Liberal Party is demanding more transparency in tracking how the funds are spent.

Duguay said that the longer consumers hear bad news, the less likely they are to embark on big spending plans and thereby contribute to a recovery.

“The recession is now, and the sooner the stimulus comes the better because, in part, when people hear bad news, that affects confidence and the effect on confidence can certainly amplify the problem,” he said.

“When consumers are nervous about employment prospects they stop spending and at that point it doesn’t matter much whether credit is available or not, they prefer not to go into debt.”

Critics say that, given the worsening crisis, the Bank of Canada’s forecast for 3.8 percent growth in 2010 -- which the bank announced last month and Governor Mark Carney subsequently defended -- is clearly too optimistic.

“It is obviously conditional and (contains) a lot of uncertainty,” Duguay said.

“The recovery that we projected starting in the second half of this year is very much predicated on confidence rebounding as the financial situation is resolved.”

The bank will release updated projections in its April 23 monetary policy report. At that time the bank, which has cut interest rates to a historic low of 0.5 percent, will also outline the next steps it might take to expand the money supply as it runs out of room to cut rates further.

Duguay said it would be premature to provide details on those plans now.

On the fiscal front, people should not panic at the return of budget deficits after 11 straight years of surplus, Duguay said. He called the expected deficit temporary and cyclical.

“We are in a very, very strong fiscal position with very little risk of a long-term deterioration,” he said.

Reporting by Louise Egan, Randall Palmer and David Ljunggren; editing by Rob Wilson

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