National bank talks down the dollar

The Bank of Canada took the wind out of the loonie’s sails Tuesday, driving down the currency nearly two cents against the U.S. dollar with a warning that it was prepared to stick to low interest rates for some time.

OTTAWA — The Bank of Canada took the wind out of the loonie’s sails Tuesday, driving down the currency nearly two cents against the U.S. dollar with a warning that it was prepared to stick to low interest rates for some time.

And although the central bank’s words have had short-term impacts on the currency before, this time the effect may last longer, economists said.

In one of the gloomier reports in months, the central bank’s governing council declared that a strong loonie threatens Canada’s economic recovery, saying its recent rise more than offset all the encouraging indicators seen over the summer.

“(The) heightened volatility and persistent strength in the Canadian dollar are working to slow growth and subdue inflation pressures,” the bank said.

“The current strength in the dollar is expected, over time, to more than fully offset the favourable developments since July.”

As expected, the central bank kept its policy interest rate moored at the historic low of 0.25 per cent, the level it’s been at since the spring.

The effect of the bank’s statement could be seen immediately.

The currency fell a penny against the U.S. dollar within minutes of the announcement and kept going, at one time trading down 2.17 cents U.S.

It closed on slightly better footing, though still down 1.98 cents at 95.17 cents U.S.

The bank now estimates the Canadian economy will shrink by 2.4 per cent in 2009.