(Updates with Carney comment on rates in second paragraph, prime minister’s comment in third paragraph.)
Sept. 20 (Bloomberg) -- Bank of Canada Governor Mark Carney said the domestic economic recovery will be hobbled by a weak U.S. recovery that could tip into another recession, and that he may extend a period of low interest rates beyond when full output is restored.
“The United States is in the midst of the weakest recovery since the Great Depression, and the bank does not expect that to change at any time soon,” Carney, 46, said in a speech today in Saint John, New Brunswick. “Given current material headwinds, the policy rate can return to its long-run level after inflation is projected to reach the 2 percent target and output is projected to reach its potential.”
The speech came after the International Monetary Fund reduced its Canadian growth forecast because of tepid U.S. growth and before Prime Minister Stephen Harper said in New York that he will make “appropriate” spending changes if needed to boost a slow recovery. The Bank of Canada kept its key policy rate unchanged Sept. 7, saying there was a “diminished” need for higher borrowing costs.
Carney also used some of his strongest language to date to describe the inaction of policy makers in other countries, calling the U.S. debt-ceiling debate a “fiasco” and saying European leaders must “re-found their monetary union based on credible fiscal arrangements.”
“The U.S. economy is close to stall speed, where a negative feedback loop between weak employment, consumer demand, and business hiring and investment could emerge,” Carney said, adding the risk of another U.S. recession “has clearly risen.”
Carney said the bank’s policy won’t be influenced by investor bets that he will lower interest rates. Trading in overnight index swaps indicate a 55 percent chance of a decrease by January, rising to 78 percent by June.
“The OIS market is making an estimation, that’s fine, but we will make the decision, I am not going to make their job easier,” Carney said at a press conference.
His earlier speech also pledged “considerable flexibility” in how fast inflation returns to the bank’s target, and said that investors shouldn’t expect him to rely on “mechanical rules” in setting interest rates.
The central bank’s “recent shift to a more downbeat outlook was reinforced today,” Emanuella Enenajor, economist with Canadian Imperial Bank of Commerce’s World Markets unit in Toronto, said in a note to clients. Carney is saying “growth will resume, but will crawl forward.”
The world’s 10th largest economy shrank at a 0.4 percent annualized pace in the second quarter for the first time since the last recession in 2009. Exports sagged as energy and automobile production was disrupted amid flagging U.S. demand and a strong dollar.
The Canadian dollar traded for 99.14 cents per U.S. dollar at 2:55 p.m. in Toronto, compared with 99.07 cents yesterday. Earlier today, it fell 0.4 percent to 99.49 cents, the lowest since Sept. 15. One Canadian dollar buys $1.0084.
Carney said net exports are expected to remain a “major source of weakness” due to modest global demand and a loss of competitiveness including the strength of the Canadian dollar.
“The risks to our economy remain largely external and are skewed to the downside,” Carney said.
Carney said the immediate concern in Europe is “growing funding pressures” on the region’s banks. He also said Europe needs a “sizeable funding backstop” for governments giving them time to rework the monetary union.
“In our opinion, the existing European resources, including the European Financial Stability Facility and the European Central Bank facilities, can be used much more efficiently to create a multiyear window for these adjustments,” he said.
In his speech, Carney called for a “comprehensive capital plan for European banks, and crucially, a sizable funding backstop for European sovereigns.”
Europe has enough capital on hand to solve its debt problems and it’s “very unlikely” there will be a repeat of the 2008 banking crisis, Carney said at the press conference.
To help counter slowing growth in the U.S., Carney said Canada will need to grow its exports in emerging markets that are expanding faster. He also said he expects commodity prices to remain at “elevated levels” on the back of sustained demand in Asia and encouraged companies to bolster productivity through “heavy investment.”
Canada sends three-quarters of exports to the U.S., and shipments abroad are equal to about a third of its gross domestic product.
“We will continue to recover, the global economy will continue to recover and the Canadian economy will continue to grow, but slowly,” Harper told reporters at the United Nations today. “The global recovery is extremely fragile.”
--With assistance from Ilan Kolet in Ottawa and Andrew Mayeda in New York. Editors: Paul Badertscher, Vince Golle
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