September 10, 2009 / 1:20 PM / 8 years ago

Bank of Canada holds rates, sees faster rebound

OTTAWA (Reuters) - Canada’s economy may rebound more sharply than anticipated in the second half of this year, the Bank of Canada said on Thursday while holding its key interest rate unchanged at 0.25 percent, as expected.

<p>The Bank of Canada building is pictured in Ottawa July 30, 2009. REUTERS/Chris Wattie</p>

In a mostly upbeat statement that triggered a rise in the Canadian dollar, the bank said expansionary fiscal and monetary policies, improvements in financial markets, higher commodity prices and a return of confidence have buoyed the economy.

“Combined with recent information on inventory adjustments and automotive production, this suggests that GDP growth in the second half of 2009 could be stronger than the bank projected in July,” it said in a statement.

In July the bank projected average annualized growth of 2.15 percent in the second half, with 1.3 percent in the third quarter and 3.0 percent in the fourth.

It won’t provide forecasts for next year until October 22, when it publishes its quarterly Monetary Policy Report.

Despite the revised outlook, the central bank repeated its pledge to hold the overnight target rate at its historic low level until the end of June next year as long as inflation stays in check.

It also 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 as needed to support growth, such as printing money.

But its language on the currency was no tougher than in the recent past. Most market players do not believe the bank will intervene to brake the currency’s surge from the four-year low it hit in March.

“I don’t think it moves the goal posts in a big way,” Doug Porter, deputy chief economist at BMO Capital Markets, said of the statement.

“If indeed growth does come in quite a bit stronger than the bank expects and the currency doesn’t flare higher from here, there may be some pressure on the bank to move ahead of its conditional commitment but I don’t think we’re there yet.”

The Canadian rose as high as C$1.0816 to the U.S. dollar, or 92.46 U.S. cents, after the statement, up from C$1.0858, or 92.10 U.S. cents, previously.

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.

“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.

The forecast of a more robust economic recovery came after the International Monetary Fund said this week that the global recovery may come three months earlier than previously forecast.

UBS on Tuesday became one of the first banks to predict a ‘V’ shaped recovery in Canada, implying a sharp upturn in growth rather than the sluggish, gradual rebound that policy makers have predicted so far.

Additional reporting by Randall Palmer, Jennifer Kwan, Ka Yan Ng and Frank Pingue; editing by Janet Guttsman

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