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The Bank of Canada is seen Wednesday September 6, 2017 in Ottawa.Adrian Wyld/The Canadian Press

A subtle warning from the Bank of Canada that it's tracking the surging Canadian dollar has taken some lift out of the currency.

The dollar fell nearly a full cent Monday to 81.3 cents (U.S.) after deputy governor Timothy Lane told an audience in Saskatoon that the central bank is paying "close attention" to how the economy is responding to higher interest rates and the "stronger" currency.

Mr. Lane's comments suggest the bank will be patient about raising its benchmark interest rate to a more normal level, analysts said.

This is the Bank of Canada "signalling a more gradual pace of rate hikes," explained TD economist Brian DePratto. "It puts it more into focus that the dollar still matters for them."

The Bank of Canada has hiked its key overnight rate twice in the past two months. The rate, which generally sets the pattern for mortgages and lines of credit, now stands at 1 per cent, up from 0.5 per cent in early July.

Responding to questions after his speech, Mr. Lane said bank officials are monitoring the impact of the higher dollar on exports and two interest-rate hikes on stretched Canadian borrowers.

"That's what data dependent looks like," he said. "We're trying to understand how the economy is evolving, and therefore what degree of monetary policy is still appropriate."

It's all part of a delicate balancing act by the central bank as it attempts to get its benchmark interest rate back up to more normal levels after nearly a decade of ultra-low rates.

The two recent rate hikes followed a surprising spurt of growth for the Canadian economy early this year. GDP surged ahead at 3.7 per cent in the first quarter and 4.5 per cent in the second quarter.

So far, the data suggests growth is becoming "more broadly based and self-sustaining," Mr. Lane said, echoing recent statements by the bank. He noted in particular that exports and business investment is picking up.

Mr. Lane's speech focused on the dangers for the Canadian economy of the ongoing talks to renegotiate the North American free-trade agreement.

Anything that impedes the ability of Canadian companies to import and export freely could force the bank to raise interest rates sooner than planned in the future, Mr. Lane warned.

"The stakes are very high," Mr. Lane said.

The possibility of a "material protectionist shift" in the NAFTA talks is a "key source" of uncertainty for Canada's economy, Mr. Lane said.

Renegotiation of NAFTA could undermine Canada's growth potential, making the economy more susceptible to rising inflation, he explained.

"We will be watching these developments, and their implications for Canadian exports and business investment, very closely," Mr. Lane said.

The United States has been pushing hard to improve its own trade position in the negotiations by demanding more domestic content in products and ending the ability of NAFTA members to challenge protectionist trade measures before independent dispute settlement panels.

A third round of NAFTA talks is slated to take place later this week in Ottawa.

Mr. Lane said Canada is particularly sensitive to trade because exports and imports make up roughly 65 per cent of GDP – one of the highest concentrations among Group of Seven countries. Canadian companies have also become highly dependent on global supply chains to stay competitive.

National Bank chief economist Stefane Marion says consumers should expect another quarter-point increase in the Bank of Canada’s key interest rate this year. The central bank hiked its rate Wednesday by 25 basis points.

The Canadian Press

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