April 1, 2009 / 6:32 PM / in 9 years

Bank of Canada softens tone on further stimulus

YELLOWKNIFE, Northwest Territories (Reuters) - The Bank of Canada signaled on Wednesday there is no guarantee it will cut rates further or use unconventional policies to combat the recession, despite an economy that it said may be shrinking at the fastest pace in at least half a century.

<p>Mark Carney, Governor of the Bank of Canada, speaks during a luncheon for the New York Association for Business Economics at the Harvard Club in New York May 22, 2008. REUTERS/Shannon Stapleton</p>

Governor Mark Carney said in a speech that Canada’s recession could extend through the second half of this year, backing away from an earlier forecast that growth would return in the third quarter.

The economy likely contracted in the first quarter at its sharpest rate since record-keeping began in 1961, Carney said.

Even so, he signaled that investors should not assume the bank will use additional tools at its disposal -- including an interest rate cut or unorthodox measures -- to stimulate growth with the central bank’s benchmark rate already near zero.

It all depends what works best to achieve the bank’s 2 percent inflation target, he said.

“Whatever type of stimulus, whether an additional reduction of interest rates or use of credit or quantitative easing, will solely be determined by achieving that target,” Carney told reporters in a news conference after his speech to a business audience in Yellowknife, Northwest Territories.

He hinted that the bank could provide the stimulus the economy needs simply by holding down rates -- now at a historic low of 0.5 percent -- for an extended period of time, without cutting further.

“Duration matters. By keeping rates low for longer, additional stimulus can be provided,” he said.

Carney reiterated that he would outline a framework on April 23 for credit and “quantitative” easing, which analysts believe could involve printing money to buy securities outright in the market.

The U.S. Federal Reserve last month unveiled bold measures to inject an additional $1 trillion into the U.S. economy, partly by buying government bonds for the first time since the 1960s. Central banks in Japan, Britain and Switzerland have taken similar moves.

But Carney emphasized that that the Bank of Canada won’t necessarily take this route.

“To be absolutely clear, outlining a framework does not necessarily imply that these policy options will be deployed,” he said.

Quite simply, the bank will only venture into using these new policies if economic developments persuade it more stimulus is needed, he said.

“That would be the trigger to moving to the next set of tools.” The suite of tools used would depend on the severity of the market conditions and the Bank of Canada is in “virtually daily” contact with other central banks on this subject.

“We have to look on the credit easing side in terms of where are there challenges ... dislocations in markets and is there something we can do in an efficient way to impact those,” he said.

CURRENCY LITTLE CHANGED

The speech may have disappointed a “significant minority” of the market that thought Carney would offer further detail on quantitative easing and move the idea forward, said Mark Chandler, fixed-income strategist at RBC Capital Markets.

“It doesn’t appear that the comprehensive plan that will come out on the 23rd will be an action plan that would soon be implemented.”

The Canadian dollar was little changed following the speech, trading around C$1.26, or 79.37 U.S. cents. Bond prices were generally firmer.

Carney “was basically downplaying expectations left, right and center” for further easing, as well as the prospect of a near-term economic recovery, said Doug Porter, deputy chief economist BMO Capital Markets.

The bank has cut its overnight rate by 4 percentage points since December 2007 and that, combined with the government’s stimulus package, will begin to gain traction in the second half and help Canada recover faster than most other major economies, Carney said.

In January, the bank projected a return to growth in the third quarter of this year, followed by 3.8 percent growth in 2010.

But Carney now sees the recession lingering longer. “The Canadian economy could continue to contract into the second half of this year,” he said.

Canada’s economy shrank 0.7 percent in January, following a 3.4 percent contraction, annualized, in the fourth quarter of last year.

Reporting by Scott Haggett; writing by Louise Egan; Editing by Jeffrey Hodgson

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