April 14 (Bloomberg) -- Canada’s central bank should increase the supply of money in the economy to spur economic growth and defend the credibility of its inflation target, C.D. Howe Institute researcher David Laidler said.

Bank of Canada Governor Mark Carney has said he will outline how he may use quantitative or credit easing on April 23. Under those policies, the central bank could use its power to create new money to purchase securities. Carney last month cut his key interest rate to 0.5 percent.

Canada’s economy fell into its first recession since 1992 last year, and the Bank of Canada predicted in January that the inflation rate would be negative in two straight quarters this year. Long spells of widespread price drops, known as deflation, can lead to prolonged bouts where consumers and businesses stop spending in anticipation of ever-falling prices.

Carney has there is little chance of deflation in Canada, and he will craft any emergency policies to keep inflation close to 2 percent.

The “recovery needs support from the continued credibility of the bank’s 2 percent inflation target,” Laidler wrote in a report from Toronto today. “There are signs that this credibility is fading over short time horizons.”

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net.

Last Updated: April 14, 2009 11:19 EDT