Loonie slides, Bank of Canada lowers growth estimates, signals rate hike far off

TORONTO - The Canadian dollar tumbled almost a full cent Wednesday after the Bank of Canada said economic growth will be lower than expected and signalled it's even less inclined than before to raise interest rates.

The bank's decision to keep its key short-term rate unchanged at one per cent surprised no one but the removal of its long-standing tightening bias was unexpected.

The loonie fell 0.89 of a cent to 96.3 cents US as analysts updated their forecasts to indicate that a rate hike isn't expected until 2015. It had earlier gone as low as 96.18 cents US.

The bank said 2013 growth will come in at 1.6 per cent, down from an earlier estimate of 1.8 per cent. And growth next year will be 2.3 per cent, down from its prior forecast of 2.7 per cent.

The Canadian dollar and other resource-based currencies had been under pressure even before the mid-morning announcement from the Bank of Canada as risk appetite faded amid concerns about China's property market.

"Risky assets have been under extreme pressure," observed Mark Chandler, head of Canadian FIC strategy at RBC Dominion Securities.

"The increase in Chinese money-market rates (as the monetary authorities leave the system a bit cash dry) has taken short-term rates higher," Chandler said.

The U.S. dollar rose amid speculation that the People's Bank of China may tighten monetary policy to cool a hot property market.

China reported Tuesday that house prices surged in some cities including Guangzhou/Shenzhen where they have soared 20 per cent year over year. Prices in Shanghai jumped 17 per cent year over year while those in Beijing were up 16 per cent.

The People's Bank reported Wednesday that outstanding real estate loans are up 19 per cent from a year ago.

There was also a report that the amount of bad loans written off by China’s largest banks increased markedly in the first half of the year.

The December crude contract on the New York Mercantile Exchange dropped $1.44 to US$96.86 a barrel, its lowest level since late June as ample supplies and a slowdown in U.S. hiring suggest subdued demand.

The U.S. Energy Department said Wednesday that crude inventories rose more than expected last week. Supplies rose 5.2 million barrels, much higher than the climb of three million barrels that analysts had expected.

December copper lost seven cents to US$3.27 a pound. Gold prices also headed downward with the December bullion contract off $8.60 to US$1,334 an ounce.