Carney predicts brief recession in Europe

The Bank of Canada expects a brief recession in Europe, governor Mark Carney told MPs Tuesday, butcautiously believes the recession will be confined to the region.

Carney told MPs at the House finance committee Tuesday thatEuropean measures will contain the debt crisis there, but that's different than resolving the issue,which will take years. He added that even the containment of the crisis may require additional steps to maintain it.

U.S. growth will also be weak for the first half of 2012, reflecting lower household confidence, he said.

Carney added the bank's projections for the U.S. doesn't include potential stimulus from U.S. President Barack Obama's jobs act, which hasn't gone through Congress yet. He said there's aboutonepercentgrowth that could happen if Obama manages to pass the bill.

Carney said he isn't going to try to read the "tea leaves" of Congress.

Consumer spending to grow slowly

An "increased probability" of a recession in the U.S. is one of the risks to Canada's economy, Carney said.

But Canadian consumer spending will grow slowly in part because of lower household confidence.

The bank expects Canadian growth to pick up after mid-2012 as the global economy improves, uncertainty dissipates and confidence increases, he said.

The bank governor said he plans to set monetary policy to hittwo per cent inflation, adding later that that target is the best contribution monetary policy can make to lowering unemployment and keeping the economy healthy.

Canadians need to look at previous interest rates, Carney said, and see what tends to be normal, becauseinterest is usually "considerably higher" than it is now.

"One of the great risks in the current environment is that Canadians take low interest ratesvery low, extremely low, historically low interest rates for granted," he said.

"In taking on a longer-term debt [like a mortgage], people should look their ability to service it at a more normal rate of interest."

Respect Greek referendum

Asked about the Greek prime minister's decision to hold a referendum on harsh budget cuts and tax increases, Carney said it was imperative in times of difficult structural adjustment and major fiscal austerity to have widespread democratic support.

"If it is the judgement of the Greek government that this is the best approach to validate that support, we fully respect that," he said.