HALIFAX - The governor of the Bank of Canada is sticking to his rosy view of the prospects for Canada's economy, saying Tuesday the country is unlikely to suffer from a sustained bout of deflation.
However, Mark Carney stressed that his reassuring prediction -- coming less than a week after he suggested the economy would strongly rebound next year -- was predicated on two conditions.
The former Wall Street investment banker, speaking to business leaders in Halifax, said stability had to return to global financial markets and the massive stimulus packages proposed for Canada and the United States had to be effective.
The Canadian government was to do its part Tuesday, tabling a budget with significant tax cuts and spending initiatives that will produce a projected $64 billion in deficits over the next two fiscal years.
But Carney stressed several times that international financial markets remained in bad shape -- a condition that could threaten Canada's economic recovery.
"We are facing a financial crisis without comparison for generations," he said in his speech. "The issues of financial stability that were once the obsession of a pessimistic few are now the daily concern of many."
Carney said the financial markets were in serious need of regulatory reform and Canada should lead the way to bring about change.
"We will do our utmost to influence the form of global financial regulation because Canada has a lot to bring," Carney said during a question-and-answer session after his speech to the Halifax Chamber of Commerce.
"We've done a lot of things right and we want the world to look more like Canada coming out of this."
The patriotic comment was one of many positive notes Carney struck during his speech.
He also said there's only a remote possibility sustained deflation will take hold of the Canadian economy, boasting of the central bank's ability to keep inflation stable and predictable throughout the 1990s.
Carney said he expects inflation to dip below zero during the second and third quarters of this year before returning to the central bank's two per cent target in 2011.
There's nothing to be worried about if this deflationary trend holds for a brief time, he said. But greater risks arise from a sustained fall in prices -- something that happened in Japan in the 1990s, which he described as a decade of "missed economic opportunity."
Deflation increases debt levels, making it more difficult for households to consume and leveraged businesses to invest. As well, purchases and investments are often postponed in expectation of lower prices, resulting in a contracting economy.
"After all, if prices are falling, why buy a new car or fridge, or invest in technology or equipment when they could be cheaper in six or nine months time?"
Canada's annual inflation rate fell to 1.2 per cent in December from two per cent in November.
With the Consumer Price Index recently dropping below zero in the United States, Carney said concerns about deflation have increased.
Still, he insisted Canada would likely avoid deflation because the country's economy remains resilient with a strong banking system, flexible labour and capital markets and an independent monetary policy.
"We expect Canadian growth to be stronger than those of other economies," he later told a news conference.
Since 1991, the central bank and the federal government have worked together to keep the rate of inflation, as measured by the 54 goods and services tracked by the Consumer Price Index, to within a range of one and three per cent.
The central bank's "bold" policies have helped keep inflation in check and they will do the same to ward off deflation, Carney said.
Last week, the Bank of Canada slashed its key interest rate to the lowest level in history, saying the country has fallen into recession and needed help to recover.
The central bank cut the trend-setting overnight rate by one-half point to one per cent.
Since December 2007, the rate has been cut by 3.5 percentage points.
"We began cutting rates sooner, and we have cut deeper than most other central banks," Carney said. "With the usual lag, these moves will have a powerful impact on economic activity and on inflation."
Carney also said he was encouraged by the fact that major Canadian banks have lowered their interest rates in response to the central bank's moves, though he conceded the private banks had not matched all of the cuts.
"We're encouraged by how the transmission is occurring," he told the crowd at a downtown hotel.
Canadian banks raised about $16 billion in capital last year, which has helped them reduce their costs and "grow credit," Carney said.
The latest data from the Bank of Canada indicates lending from the chartered banks was up last month in most categories, with sharp increases in credit-card debt and only residential mortgages showing a significant decline from November.
