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TORONTO — Canada's central bank kept its key interest rate steady on Tuesday as expected and said the country's economy is beginning to recover from recession.
The Bank of Canada has pledged to keep its key rate at the lowest possible level until the spring of 2010. The rate, which remains at 0.25 percent, is used by banks for one-day loans to other financial institutions.
Governor Mark Carney has also brightened his outlook for the Canadian economy, saying it is expected to contract by 2.3 percent this year, not the 3 percent he had forecast in April, the last time the central bank released an outlook.
And he said the economy will advance by 3 percent next year, a half-point better than his April projection.
"Stimulative monetary and fiscal policies, improved financial conditions, firmer commodity prices, and a rebound in business and consumer confidence are spurring domestic demand," he said in the statement.
Bank of Montreal economist Douglas Porter said the outlook was rosier than expected.
"They didn't quite say `Ding Dong, the Recession's Dead,' but I think they really wanted to," Porter said. "They danced all around the topic."
Carney expects that economic growth will happen sooner and stronger, but he also said it will take until the middle of 2011 for the economy to again reach full capacity. As a result, growth in 2011 will be lower than previously thought for that year because the growth will have happened earlier than expected.
The recovery will be a long and drawn-out process in part because restructuring in the auto, forestry and other sectors will take time and will hold back economic activity, the bank said. Another reason cited was that a strong Canadian dollar will keep exports low.
The Canadian dollar rose as high as 91.20 U.S. cents Tuesday afternoon from 90.73 U.S. cents earlier in the day.
"While a stronger dollar does increase the price of exports, conversely, it also decreases the price of imports," wrote Scotiabank economists Derek Holt and Karen Cordes in a statement.
The pair said that Canada's imports industry is strong, especially as it pertains to manufacturing goods and services.
The central bank also said Tuesday that it is reducing the amount of money it is making available to chartered banks in order to support borrowing and lending because it said the need for such extraordinary measures is waning.
"Indicative measures of bank funding costs ... have declined steadily from the September 2008 peak to stabilize at their lowest levels since the onset of the financial crisis," the central bank said in a statement.
As for the global economy, the bank said, "there are now increasing signs that economic activity has begun to expand in many countries in response to monetary and fiscal policy stimulus."
The central bank's global economic statement follows an announcement from Federal Reserve Chairman Ben Bernanke on Tuesday that said the outlook for the U.S. economy appears to be improving. The U.S. central bank also said it was carefully reviewing ways to withdraw its massive monetary policy stimulus when conditions permit.
