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OTTAWA (Reuters) - The Bank of Canada declared Canada's recession to be virtually over on Thursday and raced ahead of a cautious central banker pack with a mostly upbeat view on the world economy.
The worst-case scenario of global financial disaster has been "taken off the table", Governor Mark Carney said after the central bank released a surprisingly rosy quarterly outlook.
Carney predicted a turnaround in Canada's economy this quarter, an earlier-than-expected recovery from the worst recession since the 1990s.
But he warned of a long, drawn-out healing process with continued job losses. The bank stands ready to take further action to stimulate the economy, especially if a stronger dollar threatens to choke growth, he said.
"We're on track for the recovery, both in Canada and globally ... But it's early days. I mean, it's a long road," Carney told reporters.
To keep the momentum going, Carney said the bank must stick to its conditional pledge to keep its benchmark interest rate at a floor of 0.25 percent through June 2010 provided inflation does not threaten to flare out of control.
"We need to be resolute in the implementation of policy. We need to keep policy, in our judgment, stimulative for a period of time," he insisted.
The Bank of Canada has been reluctant to resort to unconventional policies, like printing money.
But Carney said it was too soon to rule that out, and he would not be afraid to use those unorthodox tools if the Canadian dollar appreciates sharply. Bank policy allows it to intervene in the currency market if extreme volatility threatens long-term growth.
"We have not changed our policy frameworks ... but we have to recognize the current situation. The dollar is an important brake on the pace of growth right now," Carney said.
"Further strength, volatility in the currency is an important risk to the outlook. And within our policy frameworks and within the context of achieving the 2 percent inflation target, the bank retains considerable flexibility and we will use that flexibility if its necessary."
The dollar rose as high as 1.0841 to the U.S. dollar, or 92.24 U.S. cents, after the report, up from around 1.0940 to the U.S. dollar, or 91.41 U.S. cents, and above the central bank's projected average rate of 87 U.S. cents.
Analysts believed Carney was trying to talk down the currency but could not predict what else he might do.
"I don't think we can rule anything out ... If I were a currency speculator I would be a little cautious these days," said Carlos Leitao, chief economist at Laurentian Bank of Canada.
The bank now sees less chance of a worst-case scenario in global markets that would delay a bounceback in Canada.
Finance Minister Jim Flaherty also chimed in with an upbeat view of the economy, where output has declined for three straight quarters. "The indicators are that the economy has stabilized and that we're moving into a period of modest economic growth," he said in Toronto.
Other central banks, while noting improvements in their economies, have been less upbeat than Carney.
U.S. Federal Reserve Chairman Ben Bernanke expressed worries on Tuesday that high unemployment could undercut the U.S. recovery. The Bank of England may decide next month to pause its asset purchase program and shift to a watching stance if it feels it has done enough to support the economy.
In April the Bank of Canada had projected a turnaround in the fourth quarter of this year. It now sees annualized third-quarter growth of 1.3 percent, rather than the 1 percent decline it forecast earlier.
That third-quarter outlook is sharply higher than the median forecast of 0.5 percent growth by analysts in a Reuters poll. The bank's fourth-quarter expectation of 3 percent is nearly twice that of analysts.
The bank also projects stronger-than-expected quarterly growth through the first half of 2010, but weaker-than-expected growth through 2011, when its current forecasts end.
Overall inflation and core inflation, which excludes volatile items, will return to the 2 percent target in the second quarter of 2011.
Other indicators also point toward recovery. The Conference Board of Canada's consumer confidence index rose for a fifth straight month in July to 13 points above where it was at the start of this year. And there was also an unexpected jump in May retail sales, which rose 1.2 percent in May from April.
Additional reporting by Randall Palmer in Ottawa and Frank Pingue and Ka Yan Ng in Toronto; editing by Janet Guttsman