Bank of Canada Governor Mark Carney says the sovereign debt crisis raging in Europe is "barely contained" and that what worries him the most about the continent’s plight is that it hurts consumer and business confidence in North America.
"The situation in Europe appears to be barely contained at this stage," Mr. Carney told reporters after a speech to the Montreal Board of Trade Wednesday, noting that European lawmakers have announced several important measures to deal with the problem while failing so far to enact them and flush out details.
The lack of appetite this week for Germany’s auction of 10-year bonds, normally a safe-haven trade, is only the latest sign that more and more investors are fleeing the eurozone. And it does not bode well for upcoming bond sales by other nations.
Asked what worries him the most about the European situation for the Canadian economy, Mr. Carney said that trade links between Canada and the Europe are not that significant at this time and the larger concern is the effect on general economic conditions here in Canada and on household and business confidence.
All of the euro-zone’s markets stands to be affected by the crisis until the situation is resolved and it’s "not surprising" that even Germany was finally touched, he said.
Spain, Italy and France are all seeing their borrowing costs rise sharply as bond yields continue to soar. France wants the European Central Bank to boost lending significantly and rescue the euro-zone but Berlin opposes the idea.
Concerns over Europe’s debt crisis were heightened earlier Wednesday when China said its purchasing manager’s index declined in November, pointing to a sharp contraction in the manufacturing sector of the world’s second largest economy. The trouble is also starting to pinch U.S. companies, as Hewlett Packard and Deere & Co. both state in recent days that sales in Europe are weakening.
In his speech, Mr. Carney said the central bank is standing fast to its price-stability policy and will keep lending rates near historic lows to limit the impact of a global economic downturn.
"We make monetary policy in the real world, where shocks are a fact of life," Carney said. "That is why the bank responds with a flexible approach, taking decisions guided by considered analysis and informed judgment rather than mechanical rules."
The governor’s comments follow a recent five-year recommitment by the central bank and the Finance Department to a so-called "inflation-targeting regime," first adopted in 1991, as the main tool for guiding the economy.
The deteriorating state of the global economy has forced Canada to lower its own growth estimates and push back its timetable for eliminating the government’s budget deficit amid threatening signs of economic and financial instability in Europe and elsewhere. The governor said the global economic outlook has weakened considerably because of the European debt crisis as financial market volatility grows.
The Bank of Canada’s key interest rate has been sitting at one per cent since September 2010, as policymakers have attempted to ward off another recession by encouraging businesses and consumers to pump more money into the economy.
At the same time, the central bank has maintained its key goal of ensuring price stability. On Wednesday, Carney reiterated that the bank will keep its key rate at the current level.
"In this environment, the bank judges it appropriate to maintain the considerable monetary stimulus in place."
Last Friday, Statistics Canada reported the annual rate of inflation eased to 2.9% in October from 3.2% the previous month. Still, that marked the 11th straight month overall inflation was above two per cent, the Bank of Canada’s target within a range of one to three per cent.
The core inflation rate, which factors out volatile items including some food and energy products, now stands at 2.1%, down from 2.2% in September.
Carney said inflation is now "near the top" of the bank’s target range, suggesting economic growth could be slightly stronger than anticipated.
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