By Gilbert Le Gras
OTTAWA (Reuters) - The Bank of Canada gave a clear signal on Tuesday that its tightening cycle may last only to next spring, despite there being substantial liquidity in the economy.
Governor David Dodge said the risks of global economic slowdown in 2007 could give the central bank pause next year.
"We mentioned these risks to indicate that it's up to us to be cautious in the spring and summer of 2006 in our monetary policy," Dodge told the House of Commons finance committee.
The central bank hiked its key overnight rate last Tuesday by a quarter of a percentage point to 3 percent. It was the second rate hike in two months.
The next three rate-setting dates are: December 6, January 24 and March 7.
Dodge's challenge is to reel in the substantial liquidity on the domestic financial markets but leave enough of a buffer so the economy is not tipped into recession, depending on how severe the potential global slowdown may be.
"There's a lot of ease in monetary policy ... we have a high degree of liquidity out there," Dodge said.
He also said it was not clear why business investment was low in Canada, the United States, Japan and Britain amid high profits and low interest rates.
Senior Deputy Governor Paul Jenkins added: "We expect that in 2006 and 2007 investment will be more vigorous than in 2004."
Dodge warned that there would undoubtedly be more job cuts in factories.
"We think there will be some further employment losses in manufacturing, but we think the economy as a whole will be generating jobs and that indeed we are likely to remain (at) or exceed the current historical levels of employment to population," he said.
Nearly 115,000 jobs have been shed by the manufacturing sector in the year ended last month, Statistics Canada said.
"In some industries, such as pulp and paper, we would certainly expect a contraction of both employment and capacity in that industry. We simply have overcapacity not just in Canada but worldwide," Dodge said.
(Additional reporting by Randall Palmer)
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