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VANCOUVER (Reuters) - The Bank of Canada repeated its concern about the strength of the Canadian dollar on Thursday, warning that it could delay the return of inflation to the bank's 2 percent target.
The latest comments came after the currency hit a one-year high of C$1.0506 to the U.S. dollar, or 95.18 U.S. cents, boosted by higher commodity prices and optimism about the global economic recovery.
The Canadian dollar is substantially higher than the level the central bank had assumed in its July Monetary Policy Report, and officials have repeatedly expressed their concern about the currency's strength.
"All else being equal, a persistently strong Canadian dollar would also reduce real growth and delay the return of inflation to target," Senior Deputy Governor Paul Jenkins said in a speech to the Vancouver Board of Trade.
He repeated the comment when asked about the exchange rate after his prepared remarks.
Jenkins reiterated the central bank's stance that, though its rock-bottom target interest rate cannot be cut further, it could take other measures such as quantitative easing, effectively printing money, to curb the currency.
"Even though we are at the effective lower bound for our policy rate, the bank retains considerable flexibility in the conduct of monetary policy," he said.
Many market players doubt the bank will intervene to weaken the currency. Still, the Canadian dollar weakened slightly after his remarks were published, slipping as low as C$1.0540 to the U.S. dollar, or 94.88 U.S. cents, from C$1.0515, or 95.10 U.S. cents, just before.
Jenkins repeated the bank's conditional pledge to keep interest rates steady through the middle of 2010 and its expectation that inflation will return to the 2 percent target in the second quarter of 2011.
He said the stronger-than-expected growth it sees in the second half of this year partly reflects temporary factors such as the U.S. cash-for-clunkers automobile program.
Asked after the speech about the inflationary pressures caused by U.S. economic stimulus efforts, Jenkins said the Federal Reserve has the technical tools and time to exit the stimulus measures and avoid the risk of inflation.
"I'm not worried from an inflationary point of view, and I'm not worried because of the confidence I do have in my colleagues at the Federal Reserve," he said.
Jenkins also cautioned the audience not to draw too close a comparison between the situation in Canada and that of Australia, where the central bank recently raised its interest rates.
Australia's economy is more influenced by the economic situation in China, while Canada's biggest outside influence is the United States, he said, in answer to an audience question.
"I think one should not draw a very tight comparison ... because the situations we face are different," he said.
With additional reporting by Randall Palmer and David Ljunggren; editing by Rob Wilson