January 21, 2010 / 4:06 PM / 8 years ago

Bank of Canada chief more confident in recovery

<p>Bank of Canada Governor Mark Carney listens to a question during a news conference upon the release of the Monetary Policy Report in Ottawa January 21, 2010. The Bank of Canada repeated on Thursday its pledge to keep interest rates at current levels until the end of June, so long as inflation remains in check, and declined to forecast rates beyond June. REUTERS/Chris Wattie</p>

OTTAWA (Reuters) - Canada’s economy is on track to recover this year and the outlook has improved since October, the Bank of Canada said on Thursday, while giving few hints on how soon it will start raising record-low interest rates.

Bank Governor Mark Carney told Canadians to prepare for an eventual return to “normal” interest rates from the key rate’s historically low 0.25 percent level, but kept markets guessing about the timing of his exit strategy.

The bank held rates steady on Tuesday and repeated its promise to keep them unchanged until the end of June, conditional on inflation staying on track.

“To be honest, (we) don’t feel compelled to provide any further guidance at this stage beyond that,” Carney told reporters at a news conference.

When asked about criticism that the bank had been “trigger-happy” after past recessions by hiking rates too soon and whether it would wait longer before doing so this time, Carney defended the bank as having “one of the best track records in the world” in meeting its 2 percent inflation target.

“It may not be a convenient path for somebody’s trading position but if they set their trading position on the basis of achieving the 2 percent CPI inflation target it would be the appropriate path and I‘m confident we will continue.”

In an interview with CBC Television, Carney repeated the bank’s rising concern about the level of household debt in Canada, first flagged by the bank last month, saying he was more concerned than he was one year ago.

Carney said he expected private businesses to start doing most of the heavy lifting to boost economic growth in the second half of this year. That would take some of the load off the central bank and the government, whose fiscal stimulus and rock-bottom lending rates have largely been responsible for the growth so far.

“2010 should mark the hand-off from growth that is heavily influenced by public policy, notably fiscal policy, in the first half of this year to growth that is largely determined by the private sector,” he told reporters.

“And then by 2011 ... the private sector would be the sole contributor to domestic demand growth in Canada,” he said.

LOWER GROWTH SEEN IN LONG TERM

Carney spoke after the central bank released a report that painted a slightly more upbeat picture of the 2010 economy, raising most of its quarterly forecasts for growth and inflation. It said exports would be stronger than it previously expected due to an improved outlook for the U.S. and global economies.

“We had a less severe recession than other major economies. We will get back, in our view, to our peak, the peak of GDP that we were at, sooner than other major economies. We expect to be there around about the third quarter of this year,” he told CBC.

Even though the bank estimates growth at 2.9 percent this year and 3.5 percent next, Carney warned that growth would be closer to 2 percent than 3 percent beyond 2011. The recession has reduced the economy’s capacity to grow and limited productivity.

“Until we see evidence of an uptick in productivity, at least at this stage, looking for real growth much north of 2 percent is not yet a realistic prospect,” he said.

The federal government’s latest projections in September are for growth of between 2.6 percent and 3.1 percent in the 2012-14 period.

The bank maintained its view that growth would come in at 3.3 percent for the fourth quarter of last year, and it lowered its expectations for first-quarter growth to 3.5 percent from 3.8 percent. But it now sees the economy expanding by 4.3 percent in the second quarter before edging down.

Likewise, price pressures are coming back faster than the bank predicted last October, with overall inflation now seen rising from 1.6 percent in the first quarter to 1.9 percent by the fourth quarter, very close to the bank’s 2 percent target.

The labor market has stopped deteriorating, Carney said, but he would not venture a bet that the jobless rate had peaked.

Despite the improved tone, the bank included all its usual caveats about the risk posed by the strong Canadian dollar to exports and uncertainty surrounding the global recovery. It said its overall profile for the 2010-11 period is largely unchanged from October and it still expects inflation to hit its 2 percent target in the third quarter of next year.

Looking beyond the two-year horizon, the bank said that countries running current account surpluses need to let their currencies rise or else global imbalances could once again burgeon.

“The important thing is that there is a suite of policy actions that will be required across all major industrialized countries to secure more balance and strong growth,” Carney said.

Reporting by Louise Egan and Randall Palmer; editing by Peter Galloway and Rob Wilson

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