The Bank of Canada will continue to take a loose approach to meeting its 2-per-cent inflation target because of the deteriorating global outlook and a European debt crisis that is “barely contained,” Governor Mark Carney says.

In his first remarks on inflation-control since the federal government renewed the central bank’s mandate earlier this month, Mr. Carney defended his “flexible” approach, which has seen him keep interest rates at 1 per cent for more than a year, even as gains in consumer prices have exceeded 2 per cent for much of that time. He has said several times in recent months that his mandate includes leeway to take longer than usual to return inflation to the target pace, to protect against economic or financial shocks.

“Flexibility is required because, when taking monetary policy actions to stabilize inflation at target, the bank must also manage the volatility that these actions may induce in the economy,” he said in a speech Wednesday to the Montreal Board of Trade.

“These tradeoffs will differ depending on the nature and persistence of the shocks buffeting the economy.”

Although Canadian growth in the second half of the year appears stronger than the central bank anticipated in its October forecast, Mr. Carney said the global economy’s prospects have “weakened considerably,” the European crisis now “appears barely contained,” and as a result, slack in the domestic economy will persist “well into 2013.”

Although Canada had recovered all of the lost output and jobs from the downturn by last summer, the economy has since been hit by “major shocks,” he said.

He noted that inflation is expected to drop to the bottom end of the central bank’s 1-per-cent to 3-per-cent target range by mid-2012; and that with the domestic financial system working smoothly, companies aren’t having much trouble borrowing. In other words, there is little urgency to tighten – or to loosen – lending conditions.

Mr. Carney acknowledged that interest rates are likely to go up at some point between now and the end of 2013, but gave no indication as to when, or by how much.

“The path for interest rates in Canada will be appropriate ... to achieve the inflation target, and we’re not going to tie our hands on that path because we’re obviously living in volatile times,” he said in news conference after his speech. “At some point over that horizon there will be a removal of monetary stimulus, but obviously we have to manage according to events.”

As to his flexibility on inflation targeting, Mr. Carney acknowledged that it has limits. Because the bank’s scope to be flexible is rooted in the success of its policy approach over 20 years, and the credibility it has built up as a result, he said, policy makers must keep a “relentless focus” on achieving the target “over time.”

He reiterated that the 2007-2009 financial crisis taught central bankers that in some exceptional cases, monetary policy may have to complement attempts by regulators and supervisors to keep the financial system stable. He added that price stability is still his “paramount” goal, even as he stands ready to assist regulators in extreme circumstances, such as tempering a dangerous buildup of credit that could have “economy-wide implications.”

He said the central bank is keenly aware that long periods of low borrowing costs pose financial risks in and of themselves. “Risk appears to be at its greatest when measures of it are at their lowest,” Mr. Carney said. “The tendency to overreach is particularly marked if there is a perceived certainty about the stability of low interest rates. In short, complacency can lead to extremes and, ultimately, crisis.”

The Bank of Canada’s next interest-rate decision is on Dec. 6. Most analysts believe policy makers will remain on hold for most of next year and possibly into 2013.