davidvic

BOC sees rate flexibility, welcomes U.S. bank plan
Tue Feb 10, 11:39 AM

(Reuters)By Louise Egan

OTTAWA (Reuters) - The Bank of Canada has plenty of flexibility to cut rates and
expand liquidity operations if needed, but it expects a U.S. bank stabilization plan
to mark the gradual return of confidence to the global financial system, Governor Mark
Carney said on Tuesday.

Grilled by legislators on a parliamentary finance committee, Carney also defended his
highly questioned forecast for Canada\'s quick recovery from the recession to growth of
3.8 percent next year.

Carney sought to assure legislators that the central bank has not run out of options
to stimulate the economy and that, in comparison to some other countries, its rate
cuts have translated into lower mortgage and other rates throughout the financial
system.

\"There is further one could move if we saw fit. We\'ve just taken a decision; I\'m not
going to take another one sitting at the table,\" Carney said.

The bank has cut its benchmark overnight rate by 350 basis points since December 2007
to a 50-year low of 1 percent. Its last cut was on January 22 and its next decision is
due March 3.

\"The actual cost of credit in this country has gone down,\" he said. \"One can expect an
additional stimulus if that were appropriate and we\'re not taking that decision yet.\"

The bank has injected billions into money markets, peaking at C$40 billion in
December, and Carney said the bank stands ready to expand those operations if
conditions warrant. He said the terms, the scale and the partners with which the bank
transacts could all expand.

\"Currently, we think it\'s sized appropriately but we could change that,\" he said.

The hope is credit conditions will improve, helped by Washington\'s anticipated move to
remove so-called toxic assets from the books of struggling banks.

The Canadian dollar remained slightly weaker following Carney\'s comments, which did
little to alter expectations that the Bank of Canada will cut its key interest rate
further.

\"The markets are pricing in pretty much another 50 (basis) point cut on March and that
will keep the Canadian dollar on the defensive in the interim period,\" said Derek
Holt, an economist at Scotia Capital.

\"WE DON\'T DO OPTIMISM\"

In defending his growth projections, Carney said the bank used 21 different
forecasting models but also applied a considerable dose of personal judgment to its
outlook, because of the highly uncertain global financial situation.

\"We don\'t do optimism, we don\'t do pessimism. We do realism at the Bank of Canada. We
don\'t do spin,\" he said.

Past rate cuts as well as future moves by the United States and other major economies,
underlie the forecast, he said.

\"What we expect, though, is that in part because of measures we have taken and in part
because of measures that we expect -- including measures that will be announced within
the next two hours by the U.S. Treasury ... that we will start to get some
stabilization in the global system,\" he said.

\"There will start to be a slow recovery in financial conditions and in confidence.\"

The U.S. Treasury Department on Tuesday unveiled a revamped financial rescue plan to
cleanse up to $500 billion in spoiled assets from banks\' books and support $1 trillion
in new lending through an expanded Federal Reserve program.

Carney said there was much more for global policy-makers to do in tackling the crisis,
and that Group of 20 leaders needed to co-ordinate their domestic and multilateral
responses.

He came down strongly in favor of regulations restricting executive bonuses at large
banks.

\"What is important is to have compensation (based on) the medium term, with medium-
term objectives, and not (one based) on the short term as is the case now,\" he said.

(Additional reporting by Randall Palmer and David Ljunggren in Ottawa; editing by Rob
Wilson and Jeffrey Hodgson)