10 February 2009

More rate cuts to come

The following is excerpted from the February 10th edition of "Toronto Star".

Facing huge uncertainty in the global economy, the Bank of Canada is ready to cut interest rates again if need be to bolster Canada's dismal business conditions, Bank of Canada Governor Mark Carney says.

"We will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required," Carney told the Commons finance committee this morning. "The Bank retains considerable policy flexibility, which we will use if required."

Last month, in an effort to rekindle economic growth, the Bank cut its trend-setting rate to 1 per cent, the lowest in 75 years.

The Bank's next scheduled rate decision is March 3.

The governor defended his prediction in January that Canada's economy would bounce back in 2010 with 3.8 per cent growth after showing negative growth of 1.2 per cent this year – a forecast widely seen as overly optimistic.

Carney said the central bank's predictions are based on hundreds of visits with business people, bank loans surveys and 21 economic forecasting models.

"We don't do optimism, we don't do pessimism. We do realism at the Bank of Canada. We don't do spin," he told the all-party committee of MPs.

But Carney cautioned that all forecasts are "subject to an unusually high degree of uncertainty" because of the speed and extent of the recent worldwide economic downturn...

Because the recession originated outside Canada, this country's recovery will depend on action by the world's leading nations to stabilize the global banking system, he said. Governments must move in concert to prevent "systemic collapse" of banking institutions around the world and promote the effective functioning of lending systems and financial markets, Carney said.

"If these national and mulilateral measures are not timely, bold and well-executed, Canada's economic recovery will be both attenuated and delayed."

He cautioned that 2009 will be a grim year and added the 129,000 jobs that disappeared in January – the largest monthly dropever – is no surprise...

Asked about efforts in the United States and Europe to rein in huge salaries and bonuses for senior executives in banks and brokerages, Carney said Canadian financial institutions need to change their compensation practices to emphasize long-term business strengths rather than short-term profits.

"It is absolutely necessary to change the system of compensation in big financial institutions. What is important is to have compensation (based on) the medium term, with medium-term objectives, and not based on the short term as is the case now," he said.