OTTAWA (Reuters) - Cautious optimism about the end of Canada's recession bloomed into full-fledged confidence on Thursday after the central bank predicted faster-than-expected growth later this year and a report showed a surge in international trade in July.
In a mostly upbeat statement that triggered a rise in the Canadian dollar, the Bank of Canada said expansionary fiscal and monetary policies, improvements in financial markets, higher commodity prices and a return of confidence have buoyed the economy.
As expected, the bank also held its key interest rate at its current 0.25 percent, an historical low meant to stimulate economic growth.
"GDP growth in the second half of 2009 could be stronger than the bank projected in July," the bank said in a statement. It did not say how much stronger.
In July it projected average annualized growth of 2.15 percent in the second half, with 1.3 percent in the third quarter and 3 percent in the fourth.
Also on Thursday, Statistics Canada reported the country posted a near-record trade deficit of C$1.43 billion ($1.32 billion) in July. But analysts said an 8.3 percent rise in imports in the month from June was a sign the economy was starting to recover from the global meltdown.
"By all appearances, the month of July finds Canada riding on the cusp of economic recovery," said Stewart Hall, an economist at HSBC Securities.
The Canadian dollar rose as high as C$1.0793 to the U.S. dollar, or 92.65 U.S. cents, after the reports, up from C$1.0858, or 92.10 U.S. cents, previously.
The economic turnaround is crystallizing just as the country braces for a possible election as early as November, the fourth in just over five years, and could boost the political fortunes of the minority Conservative government of Prime Minister Stephen Harper.
An election could still be averted if Harper wins support of one of the three opposition parties. Otherwise, he could be defeated in Parliament as early as next week, which would mean an election in late October or early November.
Despite its revised outlook, the central bank once again warned that "persistent strength in the Canadian dollar" remained a risk to the economic recovery and to inflation, and said it could react by taking unconventional measures, such as printing money, as needed to support growth.
Still, the bank's language on currency appreciation was no tougher than in the recent past and most market players do not believe the bank will intervene to brake the currency's 21 percent surge from the four-year low it hit in March.
"I think what they're pointing out are the factors that are keeping them up at night but ones that, so far, have not really kept the Canadian economy from moving from a period of recession to a transition of toward recovery," said Aron Gampel, deputy chief economist at Scotiabank.
Bank Governor Mark Carney has been suggesting that at least part of the Canadian dollar's strength has been unjustified. But if commodity prices keep rising and the economy picks up, he may adjust his thinking and consider the appreciation to be appropriate.
Finance Minister Jim Flaherty, who has been reluctant to claim triumph over the crisis, will weigh in later on Thursday in a speech scheduled for 3.50 p.m. (1950 GMT). His office will brief reporters before the speech, leading media to speculate he will update budget deficit numbers or announce new benefits for the unemployed.
On the trade front, exports rose modestly in July from June but exports to the country's top market, the United States, were down 35 percent from a year earlier.
Additional reporting by Randall Palmer, Jennifer Kwan, Ka Yan Ng and Frank Pingue; editing by Peter Galloway