The Canadian economy will continue to underperform for another 18 months, Bank of Canada governor David Dodge said on Tuesday.

In his remarks before the Senate’s banking, trade and commerce committee, Dodge said the central bank is sticking to its January forecast, which predicted growth of about 2.75% this year, rising to 3.75% in 2005.

“Such growth would return the economy to close to its production potential by the third quarter of 2005,” Dodge said.

Early data indicate that first-quarter growth this year “was marginally below 3%,” he added. “Thus, the bank’s view is that the economy is still operating significantly below its potential.”

The bank expects growth this year and next to be driven by private domestic demand.

The way the Canadian economy responds to global developments poses the main uncertainty in the forecast, but “overall, the risks to the outlook appear balanced.”

Core inflation, which removes volatile components, is forecast to average 1.5% for the rest of this year, rising to 2% by the end of 2005 as growth picks up.

Statistics Canada reported earlier today that core inflation rate was 1.3% in the year from March 2003 to March 2004.

In the question period following his prepared remarks, Dodge was asked by Senator Kelleher whether he was concerned about the uncertainty created by the lack of clear merger guidelines for banks.

In earlier testimony TD Bank CEO, Ed Clark, suggested that the government would fail to meet the proposed June 30 deadline to produce guidelines and ground rules for bank mergers.

“Regardless of the final decision, either for or against bank mergers, are you concerned about the uncertainty that would be caused by any further delays in the government arriving at those decisions?” Kelleher asked, noting that the banks are sitting on about $14 billion in excess capital.

Dodge agreed that financial business do not like uncertainty, saying, “Anything that can be done to clarify situations to increase certainty is always welcome.”

He went on to say that the prime concern at the Bank of Canada relates to the efficiency of financial markets. And, he said that its real interest is that financial intermediaries operate as effectively and efficiently as possible. But, he argued that there’s no single model for maximizing efficiency. “As you look at evidence from around the world, there is no single answer to this in terms of the structure of the intermediaries, that is whether they combine all the pillars of financial transactions or only some; nor is there a single answer about efficiency in terms of the numbers.”

“Clearly, what is absolutely important is that there be effective competition to ensure that efficiency is maintained,” Dodge said. “There is no clear answer as to how many institutions that implies in order to have effective competition. Indeed, one can observe countries with very few institutions, for example, Holland that have very effective competition and indeed one can observe countries with many more institutions where competitions is effectively not as strong.”