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Canadian dollar higher, Bank of Canada leaves key rate unchanged at one per cent

TORONTO - The Canadian dollar closed higher Wednesday even as the Bank of Canada left its key interest rate unchanged and warned that economic growth won't be as strong as expected.

The loonie was up 0.11 of a cent to 93.06 cents US after earlier going as low as 92.66 cents as the central bank said it would keep the rate at one per cent, where it's been for almost four years as the global economy recovers from the severe economic slowdown that followed the 2008 financial collapse.

Inflation has been near the two per cent level, raising speculation that the bank could move to raise rates sooner than expected. But the bank said the recent rise in prices is mainly due to temporary factors and expects inflation to fluctuate around that two per cent mark.

The bank added that "economic activity in Canada is now projected to be a little weaker than previously forecast."

Economic growth projections for 2014 and 2015 were trimmed by one-tenth of a point — to 2.2 and 2.4 per cent respectively.

However, it said "the bank still expects that the lower Canadian dollar and a projected strengthening in global demand will lead to a pickup in Canadian exports and business investment and, eventually, a more sustainable growth track."

All in all, the announcement didn't do anything to change the expectation that the bank could move to raise rates around the middle of next year.

"I felt overall it was still dovish — the statement was pretty much in line with what I anticipated," said Ken Wills, senior corporate dealer with CanadianForex.

"I would expect the timeline (for hiking) is still intact; I believe they want to stay neutral to dovish as long as they can."

Elsewhere on the economic front, data out Wednesday showed that Canadian manufacturing sales were up in May for a fourth increase in five months. Statistics Canada says sales rose 1.6 per cent to $51.6 billion. Sales rose in 11 of 21 industries, representing about 61 per cent of the manufacturing sector. The agency says the gain was largely due to higher sales in the petroleum and coal product and motor vehicle industries.

Other data showed that Chinese economic growth rose 7.5 per cent over a year earlier in the three months ended June 30 from the previous quarter’s 7.4 per cent.

The report was in line with the ruling Communist party's 7.5 per cent target for the year and higher than expectations for a 7.4 per cent advance. Analysts say Chinese leaders are willing to accept even slower growth so long as the economy generates enough new jobs to prevent unrest.

"Today's numbers should further allay fears of a sharp near-term downshift in the economy's performance," said Peter Buchanan, senior economist at CIBC World Markets.

"We continue to look for GDP growth this year to come in at or slightly above the current official 7.5 per cent target."

On the commodities market, August crude gained $1.24 to US$101.20 a barrel.

August gold bullion edged up $2.70 to US$1,299.80 an ounce while September copper was three cents lower at US$3.21 a pound.

The Canadian Press


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