Invest in Canada

Spend money- Bank of Canada urges

by investor on 05/03/09 at 1:37 pm

The Bank of Canada stressed on Thursday the urgency of fiscal action to stimulate spending and ease credit as a string of bad economic news batters consumer and business confidence.

Pierre Duguay, deputy governor at the central bank, clung to the bank’s prediction of a sharp recovery leading to 3.8 per cent growth in 2010 – a forecast many private sector economists see as too rosy.

In testimony to a parliamentary finance committee, Mr. Duguay said he saw little risk that stimulus plans posed a threat to inflation or would lead to perpetual budget deficits in the long term.

More bad economic data is due in coming months, he said, making it all the more crucial that the Conservative government’s $40-billion economic recovery plan is rolled out quickly.

“I agree there is a sense of urgency. Very clearly we will be hit by a string of bad news in the coming months,” Mr. Duguay said.

“What is absolutely critical is to maintain business and public confidence and, clearly, access to credit is essential in that situation,” he added.

The Bank of Canada has injected liquidity into money markets but Ottawa’s budget plan, still awaiting parliamentary approval, also contains measures to improve lending.

The stimulus package aims to ramp up infrastructure spending, create new tax breaks and increase the borrowing authority of public entities to fill gaps in the business credit market.

Opposition parties are likely to pass the bill but the main opposition Liberal Party is demanding more transparency in tracking how the funds are spent.

Mr. Duguay said that the longer consumers hear bad news, the less likely they are to embark on big spending plans and thereby contribute to a recovery.

“The recession is now, and the sooner the stimulus comes the better because, in part, when people hear bad news, that affects confidence and the effect on confidence can certainly amplify the problem,” he said.

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