Bank of Canda sees growth resuming

Bank of Canada Governor Mark Carney expects the Canadian economy to grow through the rest of this year and signaled on Tuesday he stands ready to use a variety of tools and policy options to ensure stability.

In a speech to the Saint John Board of Trade, Carney also said the European debt crisis is fixable but urged a comprehensive recapitalization of European banks and a funding backstop for sovereign debt.

Speaking as the debt-stressed euro zone came under increasing strain, he said Canada is more threatened by the United States where the economy is close to stall speed but not likely to fall into recession.

He emphasized that the central bank has flexibility to respond to any external shocks but fell short of signaling an interest rate cut.

For its part, the Bank of Canada has a wide range of tools and policy options that it will continue to deploy as appropriate, Carney said in the prepared text of his speech.

The bank always takes a flexible approach, he said.

The bank held its overnight target rate at 1 percent on September 7 and signaled it would hold interest rates steady for some time.

In a Reuters survey of Canada's 12 primary securities dealers following that rate decision, the median forecast was for a rate increase next July.

However, yields on overnight index swaps, which trade based on expectations for the policy rate, are pricing in a rate cut as the next move.

Carney said the central bank would be prudent with respect to the possible withdrawal of any degree of monetary stimulus, repeating cautious language he used in mid-August.

The bank will also be flexible, he added, and not necessarily bound by its inflation-targeting rule, which under normal circumstances means that it sets rates in order to bring the inflation rate to 2 percent in six to eight quarters.

For example, the bank can allow rates to return to their long-run level after inflation reaches the target, and it can shorten or lengthen the time horizon over which it expects inflation to reach that target level.

Carney pledged to provide liquidity to financial markets in the event of a massive external shock, as the bank did in the past crisis.

Before Carney spoke, the International Monetary Fund downgraded its 2011 economic growth forecast for Canada on Tuesday to 2.1 percent from 2.9 percent, and to 1.9 percent in 2012 from 2.6 percent.

In July, the Bank of Canada projected growth of 2.8 percent for 2011 and 2.6 percent next year. It is set to update its projections in October.