Sept. 28 (Bloomberg) -- Bank of Canada Governor Mark Carney said the economy is recovering from its first recession since 1992, and repeated that “persistent strength” in the currency could offset the improvement in growth and keep inflation below its target. “Growth has resumed in Canada,” Carney said in a speech today in Victoria, British Columbia. “Other things being equal, a persistently strong Canadian dollar would reduce real growth and delay the return of inflation to target.” Carney reiterated that the central bank will keep its benchmark lending rate at a record 0.25 percent until June 2010 unless the inflation outlook changes materially. He also repeated the central bank retains “considerable flexibility” to conduct monetary policy, even with the policy rate as low as it can be. Carney repeated that the economy may grow faster than the bank earlier predicted in the second half of this year, in part because of gains in automobile production and a drawdown of inventories. Factory sales advanced at the fastest pace since 1998 in July as automobile production restarted following the emergence of Chrysler Group LLC and General Motors Co. from bankruptcy. Manufacturing sales increased 5.5 percent from a month earlier to C$41.4 billion ($37.7 billion), Statistics Canada said Sept. 16. The earlier U.S. bankruptcy filings of Chrysler and GM had shuttered Canadian dealers, plants and parts suppliers. Dollar Strength The Bank of Canada forecast in July the economy will grow at a 1.3 percent annualized pace this quarter, ending a recession that began at the end of last year, and predicted fourth-quarter growth of 3 percent. Carney and other Bank of Canada officials have said since June that a persistently strong currency could derail the recovery. The currency has strengthened 12 percent this year, making the country’s goods less competitive and contributing to a 12 percent drop in the number of factory workers. A persistent currency gain would be one lasting long enough to alter the path of inflation toward the central bank’s target, Carney told reporters after the speech. Not ‘Trigger-Happy’ The currency is a “major risk” to the inflation outlook, Carney said in response to a question from the audience after the speech. He said the bank is “not out of bullets” in terms of implementing policy, adding it is not “trigger-happy.” Carney said in his speech the gain in the currency has been driven by higher commodity prices and a “generalized weakening” of the U.S. dollar, without saying how much each factor contributed. Canada’s dollar gained for the first time in four days as global equities advanced, advancing 0.5 percent to C$1.0854 at 5:39 p.m. in Toronto, from C$1.0910 on Sept. 25. Carney said the economy will have to grow less because of public spending and rely more on consumers and businesses for the recovery to take hold. “On balance, the external sector may not be reliable as the sole engine of the Canadian recovery,” he said. “In this context, domestic factors could prove decisive.” The central bank predicts the annual inflation rate will bottom out at an average of negative 0.7 percent this quarter and return to the 2 percent target in the second quarter of 2011. Carney, head of one of the first central banks to adopt explicit inflation targets, said in his speech the bank has an “unwavering commitment” to price stability and that inflation remains the “sole” policy objective. It would be “unwise” for investors to assume that interest rates today are “normal” and will remain in place forever, Carney told reporters after the speech. In the address itself, he said the commitment on rates through June 2010 “does not indicate what will happen” after that point. To contact the reporters on this story: Alexandre Deslongchamps in Ottawa at adeslongcham@bloomberg.net; Greg Quinn in Victoria, British Columbia, at 4805 or gquinn1@bloomberg.net.

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