Bank of Canada Govenor Mark CarneyKevin Coombs
The U.S. and Canadian central banks are promising to keep borrowing rates at record lows well into next year as they seek to foster a recovery that both institutions say won't hit its stride until 2011.
Both the U.S. Federal Reserve Board and the Bank of Canada signalled yesterday the recessions in their countries are all but over, echoing their counterparts at the Bank of Japan and Reserve Bank of Australia, which published similar assessments.
But just as they agree the worst is over, Fed chairman Ben Bernanke and Bank of Canada Governor Mark Carney are united in their nervousness over the fragility of a rebound that is being fuelled almost entirely by benchmark interest rates that are near zero and hundreds of billions of dollars in short-term government spending.
North America's climb out of the deepest global recession since the Great Depression is being slowed by rising unemployment that is a threat to consumer confidence and an impediment to domestic spending.
The two central banks said those concerns are offsetting what would otherwise be stronger gains from better financial conditions and increasing signs that economic activity is expanding in other parts of the world.
"I want to be clear: We have a very long haul here," Mr. Bernanke said during three hours of testimony to the U.S. House financial services committee. "It's not going to feel like a very strong economy."
Mr. Bernanke, who returns to Capitol Hill today to complete his semi-annual report to the U.S. Congress by submitting to questions from senators, reaffirmed that he intends to leave the federal funds rate at "exceptionally low levels for an extended period of time."
The benchmark U.S. lending rate is currently in a range of zero to 0.25 per cent, while Canada's key overnight target is 0.25 per cent, the lowest it can go without roiling short-term money markets.
Mr. Carney, through the Bank of Canada's latest policy statement, recommitted to keep the overnight target at 0.25 per cent until June, 2010, conditional on an unexpected burst of inflation.
Economic conditions in Canada have improved enough to warrant a brighter outlook from the central bank.
Policy makers used yesterday's statement to adjust their forecast for 2009 to a contraction of 2.3 per cent, compared with an April prediction that gross domestic product would collapse 3 per cent. GDP will expand 3 per cent next year, compared with a previous estimate for growth of 2.5 per cent, the Bank of Canada said.
The revisions reflect what the central bank said are "increasing signs that economic activity has begun to expand in many countries" as a result of unprecedented monetary and fiscal stimulus.
"The recovery is nascent," the Bank of Canada said.
"Effective and resolute policy implementation remains critical to sustained global growth."
At home, domestic demand also is getting a boost from improved financial conditions, firmer commodity prices and a rebound in business and consumer confidence, the Bank of Canada said. Growth is being significantly offset by a higher dollar that is crimping exports and restructuring in the auto and forestry industries.
The central bank's revised outlook, which it will explain when it releases its latest quarterly economic report tomorrow, puts it in line with the 2009 forecasts of Canada's biggest banks and leaves it more optimistic about 2010.
Inflation remains tame and is unlikely to pose a threat for some time. Canadian policy makers don't expect the economy to return to a level at which it risks sparking rapid inflation until mid-2011.