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Bonds News

WRAPUP 2-Bank of Canada gears up for gentle rate cuts

(Adds quotes on currency, details)

OTTAWA, Jan 30 (Reuters) - The Bank of Canada repeated its promise of lower domestic interest rates on Wednesday, and said the economy was adjusting well to a stronger Canadian dollar.

Speaking to a parliamentary committee, Senior Deputy Governor Paul Jenkins said the central bank was poised to provide more stimulus to help prevent problems in a slowing domestic economy.

But he gave no hint that Canada would match aggressive U.S. rate cuts -- the U.S. Federal Reserve cut rates by 50 basis points to 3 percent on Wednesday, following an emergency cut of 75 basis points last week. The Bank of Canada had always assumed aggressive Fed moves were likely, he added.

“In our base case projection, we had built in a considerable amount of easing on the part of the Federal Reserve, feeling that that was an important ingredient to get the U.S. economy moving forward,” Jenkins said.

The Bank of Canada cut its own benchmark interest rate last week by a quarter-point to 4 percent and Governor David Dodge said the bank generally prefers “measured” moves.

This is the first time since June 2004 that the Fed’s rate is a full percentage point lower than the Bank of Canada’s, likely pushing the Canadian dollar higher.

Jenkins insisted the central bank had no formal target for the Canadian dollar and said the bank thought a floating exchange rate was crucial to help absorb economic shocks.

But an exchange rate around 98 U.S. cents -- the level assumed by the bank in its latest projections -- was “not inconsistent with the fundamental factors at play,” he said. A broader range than that, but below parity with the U.S. dollar, would also reflect a strong economy, he added.

“The movement up to the low 90 (U.S.) cent range to around parity would not be inconsistent with the increase in our terms of trade, or commodity prices more generally. But there’s a wide confidence band around that,” he said.

Anything outside the range considered normal might influence interest rate decisions.

“It’s something we pay very close attention to, particularly if it were to move outside a range that we would think is consistent with these historical relationships. That would be something that we would clearly factor into our policy thinking,” he said.

The Canadian dollar climbed above the U.S. dollar last year for the first time in three decades, hitting highs around US$1.10 in November.

It has slipped back since then, and was at around US$1.01 on Wednesday, valuing a U.S. dollar at 99 Canadian cents.

The stronger currency boosts the cost of Canadian goods abroad and makes it harder for the manufacturing sector to compete.

“What we have seen in terms of the adjustment taking place in the Canadian economy has actually been further along than we might have expected, based on history,” Jenkins said.

“When you look at what has happened in the Canadian economy more recently, we’ve actually been pleased with the adjustment that has taken place. That’s not to say the adjustment hasn’t been difficult,” he said.

Jenkins repeated the bank’s latest economic forecasts for growth of 1.8 percent this year, rising to 2.8 percent in 2009. He expects inflation to fall below 1.5 percent by the middle of the year, before climbing back to the bank’s 2 percent target by the end of 2009.

The bank’s next interest rate decision is March 4 and will be the first under the new governor, Mark Carney, who assumes office on Friday. (Additional reporting by Frank Pingue, Renato Andrade and David Ljunggren, writing by Janet Guttsman; editing by Rob Wilson)

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