Loonie higher, BoC leaves rates unchanged

A worker at the Royal Canadian Mint checks the quality of loonies in Winnipeg on May 2, 2006. THE CANADIAN PRESS/Marianne Helm

TORONTO - The Canadian dollar closed higher Tuesday after the Bank of Canada left its key rate unchanged at one per cent and said it is still leaning towards raising interest rates eventually.

The commodity-sensitive loonie also benefited from rising oil prices, closing up 0.21 of a cent to 98.76 cents US as the bank also maintained language in its accompanying statement that signalled an eventual tightening bias, indicating that rates would rise at some point.

"Its tightening bias is kept intact by sticking to the view that next year will be a bit better than this year, with a 2.3 per cent pace, (2.4 per cent previously) enough to close the output gap by the second half of the year," said CIBC World Markets chief economist Avery Shenfeld in a commentary.

The bank observed that global growth prospects have weakened since the bank’s April Monetary Policy Report.

It noted that "while the economic expansion in the United States continues at a gradual but somewhat slower pace, developments in Europe point to a renewed contraction."

"In China and other emerging economies, the deceleration in growth has been greater than anticipated, reflecting past policy tightening and weaker external demand," the bank said in a statement.

Meanwhile, there was some disappointment on markets after Federal Reserve chairman Ben Bernanke failed to reassure traders that more stimulus is on the way to support a weakening economy.

Bernanke told the Senate Banking Committee the Fed is prepared to take further action but didn't spell out how or when. Bernanke also said that economic uncertainty is increasing, aggravated by the European debt crisis and the so-called fiscal cliff — where a variety of tax cuts expire and spending cuts take effect at the end of the year unless politicians can agree on alternatives.

Traders had hoped Bernanke would signal another round of stimulus in the form of bond purchases. A third round of quantitative easing would seek to push down long-term interest rates and encourage more borrowing and spending. The first two rounds triggered powerful rallies in the U.S. stock market.

Oil closed higher with the August crude contract ahead 79 cents to US$89.22 a barrel.

Metal prices turned lower after Bernanke's speech with copper down three cents at US$3.46 a pound while bullion dipped $2.10 to US$1,589.50 an ounce.