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It’s ironic that the recession, the very reason why you’d expect housing to be in a deep slump right now, has actually helped to propel the market higher. By ratcheting interest rates lower to stimulate economic growth, the Bank of Canada has cleared the way for mortgage rates that remain at historically cheap levels even after recent increases.

The Bank of Canada is taking a brighter view of the economy, citing stronger-than-expected household spending.

Policy makers said Tuesday that Canada's gross domestic product would shrink 2.3 per cent this year, compared with an earlier estimate in April that the economy would contract 3 per cent.

GDP will expand 3 per cent next year, compared with an earlier call for growth of 2.5 per cent next year, the Bank of Canada said in its latest policy statement .

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As expected, the central bank recommitted to leaving its benchmark interest rate at a record low of 0.25 per cent through to the middle of next year.

The revisions reflect what the central bank said are "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."

Still, the central bank called the recovery "nascent" and emphasized that "effective and resolute policy implementation remains critical to sustained global growth."

Domestic demand is being bolstered by "stimulative" monetary and fiscal policies, "improved" financial conditions, "firmer" commodity prices and a "rebound" in business and consumer confidence, the central bank said.

Canada's climb out of its first recession in almost two decades is being hindered by a higher dollar , which is making exports less competitive, and restructuring of the automotive and forestry industries. Both factors are "significantly moderating the pace of overall growth."

The central bank's description of how the stronger dollar is affecting the economy will attract the attention of currency traders.

Tuesday's language represents a marked change from the central bank's assessment of the dollar in its last policy statement June 4, when policy makers said the currency's record surge in May could "fully offset" the effects of stronger confidence and higher commodity prices.

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The loonie retreated significantly in June. This month, the currency has so far gained about 5 per cent. Tuesday's statement could speed that ascent because it suggests the central bank is less concerned about the dollar.

The reference to the dollar "seemed a bit more watered down, if not fatalistic," Michael Gregory, senior economist at BMO Capital Markets, told clients in a note.

Overall, the Bank of Canada said current economic conditions are "broadly consistent" with the outlook it laid out in April when it last published its assessment of the economy.

Policy makers continue to expect prices to decline over the next few months before returning to the central bank's target of annual increases at a rate of about 2 per cent.

Separately, the Bank of Canada said that it anticipates less demand at the cash auctions it established to help banks through the credit crunch, signalling that banks are finding it easier to find financing through private channels.

The central bank issued a schedule for the auctions through the end of the October that shows a lower minimum amounts on offer at many of the sales. The minimum amount reflects what policy makers think is needed to buoy credit markets. For example, an auction scheduled for Aug. 10 will offer at least $1-billion, replacing a previous sale of $3-billion.

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About the Author
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More

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