Bank of Canada ups economic outlook

The Bank of Canada boosted its outlook for the economy for this year and 2010, whilekeeping a key interest rate unchanged on Tuesday.

The bank left the overnight rate steady at 0.25 per cent, and repeated its statement that it plans to leave the rate unchanged until the middle of 2010.

"There are now increasing signs that economic activity has begun to expand in many countries in response to monetary and fiscal policy stimulus and measures to stabilize the global financial system," the bank said. "However, the recovery is nascent."

The bank said it now expects the economy to contract by 2.3 per cent this year, a slight improvement from the three per cent contraction it forecast in April.

For 2010, growth is now projected to hit three per cent, an improvement from April's outlook of 2.5 per cent growth. The bank did moderate its 2011 outlook to 3.5 per cent from its April forecast of 4.7 per cent growth.

"In the eyes of the Bank of Canada, the Canadian economy will rise like a phoenix from the depths in the next two years," CIBC World Markets economist Avery Shenfeld said."Todays policy announcement didnt change anything that [Bank of Canada governor Mark] Carney is doing, but the central bank is clearly less worried about the downside risks to growth.

"That degree of optimism, however, may understate the structural challenges to brisk growth abroad and the risks to Canada from an overvalued exchange rate," Shenfeld added.

Dollar concerns

In its statement accompanying the rate decision, thecentral banksaid that stimulative monetary and fiscal policies, improved financial conditions, firmer commodity prices, and a rebound in business and consumer confidence are spurring domestic spending.

However, the bank cautioned that the higher Canadian dollar, plus restructuring in somemajor industrial sectors, "is significantly moderating the pace of overall growth."

From a 2009 low of 76.98 cents US on March 9, the loonie has shot up to top 90 cents recently.

On Tuesday, the loonie initially added about two-thirds of a cent in the wake of the Bank of Canada decision, butthe dollargradually lost ground throughout the day, closingdown 0.02 of a cent at 90.33 cents US.

"The comment on the currency actually represented some easing in the banks concern relative to its April comment that 'if the unprecedentedly rapid rise in the Canadian dollar proves persistent, it could fully offset [other] positive factors' cited at the time, such as improvement in financial conditions, confidence and commodity prices," said Paul Ferley, assistant chief economist at Royal Bank.

Bank of Canada governor Mark Carney told CBC in May that he saw some positive economic signs, including a rebound in consumer confidence and positive moves in the housing market.

The Bank of Canada will lay out its expectations for the economy on Thursday when it releases its monetary policy report. The next decision on interest rates is set for Sept. 10.