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OTTAWA (Reuters) - The Bank of Canada has plenty of flexibility to cut rates and expand liquidity operations if needed, but it expects a U.S. bank stabilization plan to mark the gradual return of confidence to the global financial system, Governor Mark Carney said on Tuesday.
Grilled by legislators on a parliamentary finance committee, Carney also defended his highly questioned forecast for Canada's quick recovery from the recession to growth of 3.8 percent next year.
Carney sought to assure legislators that the central bank has not run out of options to stimulate the economy and that, in comparison to some other countries, its rate cuts have translated into lower mortgage and other rates throughout the financial system.
"There is further one could move if we saw fit. We've just taken a decision; I'm not going to take another one sitting at the table," Carney said.
The bank has cut its benchmark overnight rate by 350 basis points since December 2007 to a 50-year low of 1 percent. Its last cut was on January 22 and its next decision is due March 3.
"The actual cost of credit in this country has gone down," he said. "One can expect an additional stimulus if that were appropriate and we're not taking that decision yet."
The bank has injected billions into money markets, peaking at C$40 billion ($32 billion) in December, and Carney said the bank stands ready to expand those operations if conditions warrant. He said the terms, the scale and the partners with which the bank transacts could all expand.
"Currently, we think it's sized appropriately but we could change that," he said.
The hope is credit conditions will improve, helped by Washington's anticipated move to remove so-called toxic assets from the books of struggling banks.
The Canadian dollar traded in a narrow range during Carney's testimony, which did little to alter expectations that the Bank of Canada will cut its key interest rate further.
"The markets are pricing in pretty much another 50 (basis) point cut on March and that will keep the Canadian dollar on the defensive in the interim period," said Derek Holt, an economist at Scotia Capital.
In defending his growth projections, Carney said the bank used 21 different forecasting models but also applied a considerable dose of personal judgment to its outlook, because of the highly uncertain global financial situation.
"We don't do optimism, we don't do pessimism. We do realism at the Bank of Canada. We don't do spin," he said.
Past rate cuts as well as bank rescue plans in the United States and other countries aimed at stabilizing the financial system are "preconditions" for the Canadian recovery to happen as the bank has forecast, he said.
"If that stabilization doesn't come in the first half of this year, that recovery will be delayed and it will be weaker," he told CBC television in an interview later on Tuesday.
"What is hugely important is not announcing a stabilization
program, which is what Treasury Secretary Geithner did today, but it's executing that," he said. "Until we see the effect of execution of large components of the plan we're not going to start to get stabilization out through the United States. That's in coming weeks."
The U.S. Treasury Department unveiled a revamped financial rescue plan on Tuesday to cleanse up to $500 billion in spoiled assets from banks' books and support $1 trillion in new lending through an expanded Federal Reserve program.
Carney said there was much more for global policy-makers to do in tackling the crisis, and that Group of 20 leaders needed to co-ordinate their domestic and multilateral responses.
He came down strongly in favor of regulations restricting executive bonuses at large banks.
"What is important is to have compensation (based on) the medium term, with medium-term objectives, and not (one based) on the short term as is the case now," he said.
Additional reporting by Randall Palmer and David Ljunggren in Ottawa; editing by Rob Wilson and Jeffrey Hodgson