Cautious Bank of Canada to be "prudent" on rates

Fri Aug 19, 2011 10:59am EDT
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By Randall Palmer and David Ljunggren

OTTAWA (Reuters) - The Bank of Canada will be "prudent" as it determines whether to withdraw stimulus from the domestic economy in the face of a weak U.S. recovery and tensions in Europe that could yet trigger more market problems, the bank's head said on Friday.

In testimony prepared for a parliamentary committee, Bank of Canada Governor Mark Carney said the United States faces its weakest economic recovery since the Great Depression, after a recession that turned out to be deeper than first thought.

Problems surrounding Europe's sovereign debt crisis had intensified, while Canada's economy might contract slightly in the second quarter, he added.

"Acute fiscal and financial strains in Europe have triggered a generalized retrenchment from risk-taking and could yet prompt more severe dislocations in global funding markets," Carney said in testimony that struck frequent notes of caution about the health of both the Canadian and the global economy.

It is rare for parliamentary committees to hear testimony of this nature during the summer break.

Canada's opposition New Democrats had called for the hearings as financial markets swooned during what is traditionally a quiet summer season, partly on fears that the world was heading back into recession.

Speaking ahead of Carney, Finance Minister Jim Flaherty said the world economy is still growing, albeit slowly, and Canada is ready to act pragmatically if that slowdown deepened and affected the domestic economy.

Carney was also cautious, noting that Canada's economy would see only minimal growth in the second quarter, or possibly a slight contraction.   Continued...

<p>Bank of Canada Governor Mark Carney arrives to testify before the House of Commons finance committee on Parliament Hill in Ottawa August 19, 2011. REUTERS/Chris Wattie</p>