Bank of Canada holds rates, sees better forecast

Tue Jul 21, 2009 9:27am EDT
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OTTAWA (Reuters) - The Bank of Canada held its key interest rate at 0.25 percent on Tuesday, as expected, and gave a rosier economic forecast while softening its language on the strong Canadian dollar.

"There are now increasing signs that economic activity has begun to expand in many countries in response to monetary and fiscal policy stimulus and measures to stabilize the global financial system. However, the recovery is nascent," it said as it announced its rate decision.

The central bank said it now saw the Canadian economy shrinking by 2.3 percent, not the 3.0 percent seen in April; and growing by 3.0 percent rather than 2.5 percent in 2010. In 2011, it sees growth at 3.5 percent rather than 4.7 percent.

It said the higher Canadian dollar and industrial restructuring was "significantly moderating the pace of overall growth". This was softer language than in June, when it had said the "unprecedentedly rapid rise" in the currency could "fully offset" positive factors.

The Canadian dollar rose as high as C$1.0965, or 91.20 U.S. cents, from C$1.1022, or 90.73 U.S. cents just before the announcement.

In language closely watched by the market, the bank said the overall risks to its inflationary outlook remained slightly tilted to the downside because it is not able to cut rates any further, while the macroeconomic risks remained roughly balanced.

It still sees total inflation hitting a trough in the third quarter and core inflation diminishing in the second half of the year. But both measures are now seen returning to the 2 percent target by the second quarter of 2011 rather than the third quarter of 2011.

It repeated its language that it "retains considerable flexibility in the conduct of monetary policy at low interest rates." That is code for saying it could use quantitative easing -- effectively printing money -- if it had to. But it gave no indication it was considering this at the moment.

(Reporting by Randall Palmer; Editing by Kenneth Barry)