Carney says Europe debt crisis critical for Canada

Bank of Canada governor Mark Carney said Wednesday the European debt crisis is one of the biggest issues facing Canada's economy.

Carney said at a news conference Wednesday that Canada was working "intensely" with its European peers as the region tries to develop a strategy to shore up banks and debt-burdened economies.

He said the central bank's view is that Europe's debt crisis will be contained.

The European crisis and weakness in the U.S. economy will have an impact on Canada, Carney said, and if those issues worsen, the bank would "mark down" its estimate for domestic economic growth.

When challenged by a journalist on why the central bank had not made a commitment to low rates similar to what it offered in the spring of 2009 as the country emerged from the last recession, Carney replied that had been an unusual situation.

Back then, he said, rates had reached what was effectively near zero.

"At that point in time our feeling was … that the economy needed additional stimulus, so the conditional commitment providing some guidance on where we expected interest rates to be in the near term provided additional stimulus for the Canadian economy," he said.

"We are not [now] at that point," Carney added, calling the 2009 measure an "unconventional policy tool."

"We don't provide a path for interest rates when we are not at the effective lower bound and even if we were … it is possible to be there and not have to provide that additional guidance. It depends on the circumstance."

Earlier Wednesday, the bank released its latest monetary policy report, a day after the bank lowered its forecast for Canadian economic growth.

The monetary policy report said the global risks to the Canadian economy have increased since the last report in July. It cited more volatility in stock markets, as both banks and consumers decrease debt, increased government spending cuts and falling business and consumer confidence around the world.

Expanding on Tuesday's forecast, the report said the Canadian economy is currently in a near stall and predicted it will grow by only 0.8 per cent in the final three months of this year.

But Carney stood by the bank’s prediction for growth overall in 2011.

Some economists had speculated there was a chance the Canadian economy would actually not grow through the summer and fall.

But the bank said that won't happen, because the third quarter will record a relatively strong bounce-back of two per cent growth.

And although the October-December months look weak, it expects the economy to start edging back up at the beginning of next year and continue to expand, albeit slowly.

"Overall, the bank now projects slow growth in real gross domestic product in Canada through mid-2012," it said.

"Economic growth is expected to improve thereafter, in line with an improved global environment as uncertainty dissipates and confidence recovers."

Bank lowers inflation estimate

The central bank on Tuesday, as expected, also kept interest rates super low at 1.0 per cent. The bank's policy rate has been at 1.0 per cent for over a year.

The bank also said Canada's economy likely grew a modest 2.1 per cent this year — most of it in the first quarter — and will fare even worse at 1.9 per cent next year. 

Both numbers were 0.7 percentage points less than the bank had projected in July.

The bank projected that the economy will expand by 2.9 per cent in 2013.

It also predicted the eurozone would fall into a brief recession.