(Updates with Carney comment on German auction in second and 12th paragraphs, economist comment in fourth paragraph.)
Nov. 23 (Bloomberg) -- Bank of Canada Governor Mark Carney said he will keep “considerable monetary stimulus” in place amid signs the economy is growing faster than forecast, citing a weakening global outlook and financial market volatility.
The European debt crisis “appears barely contained,” Carney, 46, said in a speech to a business audience in Montreal today. “The global economic outlook has weakened considerably and financial market volatility has increased,” he said in the speech, citing at a later press conference weak demand seen at a German bond auction today as an example of the upheaval.
The Bank of Canada has kept its benchmark rate at 1 percent since September 2010, even as rising energy prices drove the country’s inflation rate higher. Carney today said that while some large global risks remain, domestic companies are benefiting from stable banks and a drop in bond yields that make it easier to borrow and expand.
“This is consistent with the bank remaining on the sidelines instead of following through with additional monetary stimulus,” said David Tulk, chief Canada macro strategist at Toronto-Dominion Bank’s TD Securities unit, in a client note.
Canada’s dollar dropped to a seven-week low today on signs Europe’s debt crisis is widening. The currency weakened 0.8 percent to C$1.0469 per U.S. dollar at 3:49 p.m. in Toronto after falling to C$1.0498, its weakest level since Oct. 5. One Canadian dollar buys 95.52 U.S. cents.
Carney said that there is “preliminary evidence” that the economy is growing faster in the second half of the year than the central bank had forecast last month. He added that a drop in “global risk-free yields” was also supporting the economy through “our well-functioning financial system.”
The Ottawa-based central bank forecast last month that growth would return in the third quarter following a 0.4 percent annualized contraction in the April-June period. The Monetary Policy Report projected second-half growth would average 1.4 percent, an outlook Carney said today is too low, without giving a specific forecast.
Consumer prices have also remained elevated as the economy recovers. Inflation rose 2.9 percent in October from a year earlier, according to Statistics Canada. The central bank aims to keep inflation in the middle of a 1 percent to 3 percent range.
Still, mounting concerns about the European debt crisis will weigh on the Canadian economy, Carney said.
“A weaker external outlook is expected to dampen growth in Canada through financial, confidence and trade channels,” Carney said. “In this environment, the Bank judges it appropriate to maintain the considerable monetary stimulus in place.”
Germany earlier today failed to get bids for 35 percent of the 10-year bonds offered for sale today, propelling borrowing costs in Europe higher and the euro lower on concern the region’s debt crisis is driving away investors.
“It isn’t surprising that we see ramifications across all countries and markets in different forms,” Carney said at a press conference after the speech. “I wouldn’t overplay what happened today, but all aspects of the eurozone are going to be affected until the situation is resolved, and that is going to require multiple measures.”
Carney said excess economic supply will persist “well into 2013” and a reversal of earlier increases in food and energy prices will push inflation toward 1 percent by the middle of next year. The Bank of Canada had said in last month’s Monetary Policy Report that the economy would return to full capacity by the end of 2013.
Renewal of Target
Today’s speech, Carney’s last before the Dec. 6 announcement on the bank’s benchmark interest rate, focused on this month’s renewal of the Bank of Canada’s monetary policy agreement with the government which aims to keep inflation at a 2 percent target.
Carney said the bank’s inflation-targeting regime and its “inherent flexibility” allowed the country to handle the global financial turmoil of 2008 and 2009.
The bank had spent the last five years studying if the targeted inflation rate should be lower or if the level of the consumer price index should be the focus instead of the inflation rate. Carney said today both those options pose risks that make them unattractive.
Carney, who was named head of the Financial Stability Board earlier this month, was also critical of suggestions that central banks should seek to target inflation rates higher than 2 percent, in part to help ease the burden on heavily indebted countries.
Carney said such suggestions were “siren calls” that risk de-anchoring inflation expectations.
Price level targeting may “merit consideration” in heavily indebted countries as a temporary unconventional policy tool, Carney said, though it’s not clear it would help much under current circumstances where the price level has not been “all that weak.”
At the press conference, he also said that the FSB and other regulators need to better communicate why new rules are needed, in response to a question about global ‘Occupy’ protests.
--Editors: Paul Badertscher, Gail DeGeorge
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