December 17, 2009 / 7:45 PM / in 8 years

Bank of Canada doubts double-dip global recession

OTTAWA (Reuters) - The world could head into a double-dip recession, Bank of Canada Governor Mark Carney said in an interview broadcast on Thursday, but this is not what the central bank is forecasting.

"Internationally, significant fragilities remain," Carney told Business News Network, saying the key to recovery is the handoff of economic stimulus from the public sector to the private sector.

"And at this stage we see that (handoff) more likely. Growth is becoming a little more solidly entrenched but it's not assured. And that's what we mean when we talk about fragilities," he said. "And in that context, of course there is a possibility of a double dip. But that is not our core forecast at all."

Carney said it is important for countries in the Group of 20 leading economies to start setting out reasonable exit strategies from the stimulus measures they have been taking, though it does not mean they should start implementing those strategies immediately.

Efforts to stimulate the economy will be self-defeating for countries that do not have credibility on the fiscal side, he said, warning that problems over sovereign debt could become an issue over the medium term.

Carney gave the interview on Wednesday and it was aired on Thursday.

Looking at Canada's situation, he said he judged the central bank's current plan to keep its overnight interest rate at 0.25 percent through next June to be the most appropriate. But he said that if necessary the bank could raise rates before the end of June or after.

Speaking of the mid-2010 timetable for keeping rates steady, Carney said: "We have the flexibility to adjust it, either by shortening it or lengthening it, if that's what's necessary to achieve our mandate."

One of the risks to the bank's outlook is increasing household debt, and the bank has been warning Canadians not to take low interest rates for granted when they buy houses and take on debt.

"We want to make sure people understand that we're in exceptional circumstances," he said. "At some point rates are going to rise, the cost of borrowing is going to normalize."

But he said he did not see a bubble in Canada's booming housing market. "We're not drawing attention to a specific issue around valuation in housing in Canada at this point," he said.

Carney also signaled that international rules to raise capital requirements for banks can only be brought in gradually.

"The last thing any policymaker, any central banker or supervisor who sits on the Basel Committee ... the last thing we're going to do is put in a new capital regime that slows the recovery," he said.

Under new rules, banks will have to have more and higher-quality Tier-1 capital, and probably also an additional capital requirement that varies through the credit cycles to help moderate those cycles.

Carney has often said banks should be required to store up enough capital in good times to be able to get through tough times.

Additional reporting by David Ljunggren, Frank Pingue and Ka Yan Ng; editing by Peter Galloway

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