Finance & Business World

The Bank of Canada, which pared its key lending rate close to zero this week, will outline new rules today for the possible use of extraordinary measures if the economy needs another boost.

The central bank will release the guidelines along with a Monetary Policy Report at 10:30 a.m. in Ottawa. Economists say Governor Mark Carney may avoid large-scale use of quantitative and credit easing policies because the country’s banks are expanding credit through the biggest global financial crisis since the 1930s.

Canada’s economy is in a deepening recession and inflation will remain below target for more than two years, policy makers said April 21. The bank said cutting its lending rate to a record low 0.25 percent and likely keeping it there for more than a year should be enough to revive the economy and eventually return inflation to its target of 2 percent.

“They have said with absolute clarity to the market that we are done” with interest rate cuts, said Derek Holt, economist at Scotia Capital in Toronto. “They have tipped their hat. They are going to take a very tepid move to quantitative easing in Canada.”

The central bank would most likely purchase assets to inject cash into the economy, according to 14 of 24 economists surveyed by Bloomberg News from April 8 to April 16. The other 10 said existing programs to purchase securities and sell them back to investors would most likely be broadened, without expanding the money supply.

‘Very Dangerous Bet’

The Bank of Canada probably won’t lay out any schedule for extraordinary monetary policy action today, Holt said. “The main idea is to signal policy intentions and to lay it out clearly that if the markets have something other than the bank’s intentions in mind, they could be placing a very dangerous bet,” Holt said.

The new policies could lead the bank to add between C$10 billion ($8.1 billion) and C$50 billion starting by July, the survey found.

“I expect them to basically put forward a ‘Canada-light’ version of quantitative easing and it won’t be as aggressive as the U.S.,” said John Clinkard, economist at Deutsche Bank in Toronto no fax payday loans. “Our economy hasn’t been as stressed.”

The U.S. Federal Reserve has more than doubled the size of its balance sheet, to $2.2 trillion last week from $884 billion a year ago. The Bank of Canada balance sheet grew 53 percent from April 2008 to the end of March this year, rising from C$53 billion to C$81 billion.

Not ‘Pre-ordained’

The central bank this month posted definitions of extraordinary policies on its Web site. It said quantitative easing involves creating new money to purchase government or private assets to encourage new bank lending. Credit easing involves purchasing assets in “credit markets which are important to the functioning of the financial system,” and may not involve creating new money, the central bank said.

Carney has said that publishing the rules doesn’t mean using the policies is “pre-ordained.”

No Canadian bank has sought a bailout since credit worldwide seized up in August 2007, and Carney said in an April 1 speech that foreign banks would need to raise $1 trillion in new capital to reduce their leverage to Canadian levels.

Those stronger balance sheets have helped keep credit flowing through Canada’s economy. Consumer and business credit has risen 11 percent since August 2007 to C$2.53 trillion.

“You can afford to do less and still have the desired impact,” said Eric Lascelles, chief economics and rates strategist at TD Securities in Toronto. “If conditions improve, it might never happen at all.”

Carney will also give more details today of the bank’s forecast for an economy that he said is slipping into a deeper recession. The Bank of Canada two days ago said the economy will shrink 3 percent this year, instead of the 1.2 percent contraction predicted in January. Next year, the central bank says the economy will grow 2.5 percent, down from an earlier growth projection of 3.8 percent, with 2011 growth forecast at 4.7 percent.

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