Bank of Canada sees economic thaw, warns of risks

Thu Feb 4, 2010 4:42pm EST
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By Rod Nickel

WINNIPEG, Manitoba (Reuters) - The Canadian economy is looking up and should recover its lost ground this year, well ahead of Japan and Europe, though possible storms lie ahead, Bank of Canada Governor Mark Carney said on Thursday.

"My message is relatively straightforward: the thaw is coming," he said. "The recovery has begun. After a brutal economic winter, spring is within sight."

The optimistic signs in his speech were enough for Scotia Capital to suggest he was carving an independent exit strategy, possibly hiking rates before some other advanced economies, though this was not a unanimous view.

"On net, we read this as a speech that reinforces the notion that the need for emergency levels of stimulus is over," Scotia economists Derek Holt and Karen Cordes wrote, suggesting hikes by the third quarter and quite possibly earlier.

The comments had limited market impact, with Canadian stocks and the currency tumbling on fears about debt-laden European economies.

Carney said Canada's labor market appeared to have stopped bleeding, businesses expect to make modest fixed investments this year, the private sector should be the sole contributor to Canada's domestic demand growth next year and real output should reach pre-crisis levels by the third quarter of 2010.

By contrast, it will be 1-1/2 years before Europe and Japan reach their pre-crisis levels, he said.

The central bank has promised to keep interest rates at rock bottom through the middle of this year, assuming inflation remains tame. In a subsequent news conference Carney said current monetary policy was still appropriate.   Continued...

<p>Bank of Canada Governor Mark Carney speaks to the media in Toronto December 16, 2009. REUTERS/Mark Blinch</p>