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Canadian dollar extends surge on BoC economic outlook

Carolyn Wilkins, Senior Deputy Governor and Stephen Poloz, Governor of the Bank of Canada.

Sean Kilpatrick/The Canadian Press

A top Bank of Canada official says economic growth has spread to most regions and industries in Canada – the latest clue that the central bank is pondering when to start raising interest rates.

The central bank is seeing "some signs that growth is broadening across regions and sectors," senior deputy governor Carolyn Wilkins told a business audience on Monday in Winnipeg. Her remarks sent the Canadian dollar flying: The loonie jumped more than half a cent immediately after they were posted on the bank's website. By Monday evening, it rose above 75 cents (U.S.) for the first time since April.

The loonie continued its climb into Tuesday. It was just below 75.5 cents in the early hours.

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"We are seeing the economy pick up," insisted Ms. Wilkins, Governor Stephen Poloz's No. 2 executive at the bank.

The improving outlook has prompted the Bank of Canada to start looking ahead to its first rate hike in nearly seven years.

Ms. Wilkins said the central bank will be "assessing" whether to keep pumping low-interest fuel into the economy as "growth continues and, ideally, broadens further."

The economy surged ahead at an annual pace of 3.7 per cent in the first quarter.

Bank officials seem relatively unconcerned that inflation has drifted lower in recent months and now sits well below the bank's 2-per-cent target. Ms. Wilkins played down recent weak inflation numbers, saying much of it is "transitory" and caused by intense competition in the grocery business.

Ms. Wilkins hinted that the bank may have to act pre-emptively as it anticipates how economic conditions will evolve.

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"If you saw a stop light ahead, you would begin letting up on the gas to slow down smoothly," she said. "You do not want to have to slam on the brakes at the last second. Monetary policy must also anticipate the road ahead."

It is the clearest sign yet of a bias towards tightening monetary policy. The bank's key overnight-interest rate has been fixed at 0.5 per cent since July, 2015, when it made the second of two quarter-point cuts to deal with the aftershocks of the oil price collapse. The Bank of Canada has not raised rates in nearly seven years.

Nonetheless, most economists who follow the central bank don't expect an interest-rate hike until some time next year.

Toronto-Dominion Bank economist Brian DePratto said Ms. Wilkins appears to be "preparing markets" for eventual higher rates.

"This speech may be sending a clear signal, but don't expect the Bank of Canada to hit the hike button just yet," added Mr. DePratto, who doesn't expect a rate increase until early 2018. "A significant haze of uncertainty continues to hang over the economy."

As evidence of the economy's "broadening" strength, Ms. Wilkins pointed to the resumption in business investment, largely driven by a bounce-back in spending in the oil patch. She also said that consumer demand has picked up in the energy-producing provinces, leading to a broadening of economic strength and job creation across the country. A chart accompanying Ms. Wilkins's speech shows that employment is up in eight out of 10 provinces since last October. New Brunswick and Newfoundland and Labrador have continued to lose jobs.

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Growth is also spreading across sectors and industries, Ms. Wilkins said. More than 70 per cent of industries are now expanding output. She highlighted computer systems and design, which has grown at a rate of 10 per cent in the past year – a sector that is now as large as vehicle production and aerospace combined.

But the economic news is not all good. Ms. Wilkins pointed to a number of risks that could cause the economy to stall, including another fall in the price of oil, sluggish exports and the continuing uncertainty over what U.S. President Trump will do on taxes and trade.

"We are all acutely aware of the uncertainty around the policies of the U.S. administration – whether it is about trade, tax or the regulatory environment," she said. "Until we get more information, it will be difficult to gauge the impact of any proposed policy changes more precisely. This will remain an important uncertainty in our projection, but life goes on and decisions must be made in the meantime."

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