Bank of Canada sees lengthy recession

The Canadian economy continues to struggle, the return to growth will be delayed by one quarter — until the end of 2009 — and recovery will be more gradual, Bank of Canada Governor Mark Carney told the House of Commons Standing Committee on Finance on Tuesday.

“Our projection is similar to our projection in January,” Carney said. “The recovery has moved out by a quarter and that projection has flattened a bit.” The flattening stems from delays in the stabilization of the worldwide financial system and because commodity prices have eased, which Carney says will have a negative effect on income in Canada.

He noted an underlying assumption of Bank’s projection is that steady progress will be made on the stabilizing of banking systems in the U.S., U.K. and Europe. The first hints of progress will come when results of stress tests are revealed on May 4.

“We need to see the results and the institutions themselves need to move forward with capital raising, and then separate the toxic assets, legacy assets, from the institutions,” said Carney.

Carney responded to panel questions about inflation potential by saying Bank sees an easing of headline inflation in the short term, and turning negative in third and fourth quarter 2009. The dip will largely be due to declining energy prices. But, he added, core inflation will also come down over the balance of this year before returning to the target rate of 2% by 2010 or 2011.

The Bank had indicated earlier this month that it intended to keep interest rates at a low level in an effort to influence markets. Carney noted that commitment is conditional on inflation staying low.

Should the recession deepen, and additional stimulus become necessary, Carney said the Bank retains options to engage in qualitative and quantitative easing, both of which involve the purchase of assets. He stressed the Bank would act prudently if it went down that road and ensure it had a ready exit strategy.

(04/28/09)