OTTAWA — Bank of Canada governor Mark Carney pledged he would resort to controversial non-traditional monetary policies such as so-called quantitative and credit easing only if absolutely necessary.
The central banker attempted to reassure a parliamentary committee Tuesday that if he has to start printing money and risk debasing the currency, he would do so because the risk to the economy left him no choice.
“I want to be absolutely clear: the Bank of Canada has absolutely zero interest in using an unnecessary strategy,” he said.
Carney said the risk of a further economic shock remains, but he suggested the risk is small, because he believes the United States and Europe are serious about fixing their banking crisis and the measures adopted by the Bank of Canada are beginning to work.
He said last week’s decision to drop the target rate to 0.25 per cent and take the unusual move of making a conditional pledge to keep it at the lowest practical floor for a year has affected credit markets.
He said the action has resulted in lower interest rates “further out the yield curve” and improved the spread between Canada and the U.S. rates in Canada’s favour.
“We had a big impact as we expected we would,” he said.
The unusual commitment to keep interest rates so low was called “unprecedented” by TD Bank chief economist Don Drummond and was praised by all members of the House of Commons finance committee Tuesday.
But Carney got a rougher ride over his unveiling of options to expand the money supply through quantitative or increasing credit in troubled sectors through the direct purchase of corporate assets.
Increasing the money supplywas once a common feature of monetary policy, but has seldom been tried in a modern economy in conjunction with a policy interest rate at virtual zero.
Conservative MP Maxime Bernier said expanding the money supply not only risks inflation down the road, but lead to a return to the kind of cheap money conditions that triggered the financial crisis in the first place.
Carney conceded future inflation was a risk, but said he intended to use the tool cautiously and fairly.