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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.
"The considerable external headwinds that the bank has long identified are now blowing harder," Carney said, noting that a strong Canadian dollar was curbing demand for Canadian goods in the United States.
"Largely reflecting such external factors, recent Canadian data has been consistent with minimal to slightly negative growth in the second quarter."
Up to a month or so ago, when economies around the world started showing increasing signs of stress, most analysts had expected the Bank of Canada would raise interest rates again later this year or early next, in line with its promise to keep inflation around its 2 percent target.
But Carney made it clear that a rate rise would depend on what the economy did.
"Since the crisis erupted, the bank has demonstrated its flexibility and nimbleness in the conduct of monetary policy," he said. "As the Canadian recovery has progressed, we have emphasized that we would be prudent with respect to the possible withdrawal of any degree of monetary stimulus."
Additional reporting by Ka Yan Ng, Trish Nixon, John McCrank and Cameron French; writing by Janet Guttsman; editing by Rob Wilson