June 4, 2009 / 1:17 PM / in 8 years

Bank of Canada holds rates

OTTAWA (Reuters) - The Bank of Canada held its key interest rate unchanged on Thursday at 0.25 percent, as expected, but sent a shot across the bow of currency markets with unusually strong comments on the economic threat posed by the sharp appreciation of the Canadian dollar.

<p>The Bank of Canada building is pictured in Ottawa March 3, 2009. REUTERS/Chris Wattie</p>

The central bank made no mention in its statement of unconventional monetary easing, such as printing money to buy securities, signaling it maintains the view that further stimulus is not required any time soon.

It noted recent significant improvements in financial conditions and commodity prices and a modest recovery in consumer and business confidence. But it said all of that could be lost if the Canadian dollar -- which rose 9.3 percent against the U.S. dollar in May -- sustains current levels.

“If the unprecedentedly rapid rise in the Canadian dollar (which reflects a combination of higher commodity prices and generalized weakness in the U.S. currency) proves persistent, it could fully offset these positive factors,” the bank said.

The bank said the risks to the economy are roughly balanced but it maintained its view from April that there is a bigger risk that inflation could be lower than projected. This is because it can no longer cut interest rates, which are already at their lower limit, in order to boost prices.

Reporting by Louise Egan; editing by Randall Palmer

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