Bank of Canada open to less conventional measures
Published Thursday, April 23, 2009 6:06PM EDT
Last Updated Friday, May 18, 2012 10:44PM EDT
The Bank of Canada says it will keep the key lending rate at the bargain basement price of .25 per cent until next June, and if that doesn't help Canada survive the recession it will take less conventional measures.
Bank of Canada Governor Mark Carney predicted Thursday that exports are going to continue to fall and as a result Canada's export-driven economy will struggle in the coming months.
He said the economy will shrink by 3 per cent this year, with growth resuming in the fall and accelerating to 2.5 per cent in 2010, then 4.7 per cent in 2011.
Carney said the central bank is committed to keeping the key lending rate at .25 per cent until June 2010, and believes the low rate is the key to weathering the global economic storm.
"However these are uncertain times and if additional stimulus were to become necessary the bank retains considerable flexibility in the conduct of monetary policy at low interest rates," Carney said.
There are two main tools left available to the central bank if needed, he said.
The bank can effectively print money by buying government bonds and assets from banks, in order to free up the institutions to loan more money to clients.
The other tool at the central bank's disposal is the ability to purchase toxic assets from corporations to give them more room to invest in areas such as inventory and new equipment.
CTV's Ottawa Bureau Chief Robert Fife was in the Bank of Canada media lockup on Thursday morning, and said Carney chose his words carefully.
"The bank is not saying when it will use those two tools. Right now it is saying at this moment we believe the low interest rates will be enough to help the economy recover. If it isn't they will step in and use these two tools," Fife said.
The bank also said layoffs, restructuring and plant shutdowns in the auto and forest sectors have caused damage that will affect the economy's ability to rebound in the future.
Finance Minister Jim Flaherty said the government's prediction for 2009 was much less rosy than the Bank of Canada's, and he isn't surprised the growth forecast has been revised.
He told CTV Newsnet that growing unemployment, much of it due to layoffs in the struggling auto industry, is a major contributor.
"We are going to have significant unemployment this year. One of the realities is that employment goes down sharply, creating more unemployment, and comes back much more gradually and we're going to have to endure that as we go through the year."
Flaherty said the government has mitigated the damage with changes to the employment insurance plan and efforts to retrain laid-off workers.
In explaining the Bank of Canada's initial rosier prediction for 2009, Carney said in an interview on CTV's Power Play that the bank believed there would be "considerable progress" in fixing the banks and stabilizing the financial systems in G7 countries.
"That progress hasn't happened," he told host Tom Clark, adding that "finally now, the plans are in place and are being implemented. (But) it's still a big if, it's still a big element of our current forecast. But at that point, we expected more progress than, quite frankly, we received."
Carney did not rule out that the Bank of Canada could once again revise its outlook, dependent on the progress of the reforms put in place.
"The important thing is, we've taken action, we've acted swiftly, as the reality moved away from (the initial) forecast," he told Power Play. "If we had to act again, if things did get worse, what we wanted to put out today was clarity on the type of options we could pursue."
Flaherty says billions of dollars of stimulus spending is now working its way through the economy, and that should spur growth. But he has not ruled out another round of spending when he delivers his fall economic update.