Sept. 10 (Bloomberg) -- The Bank of Canada kept its key interest rate at a record low and said persistent strength in the country’s dollar is threatening to derail growth that may be faster in the second half of the year than it earlier forecast.

The target rate for overnight loans between commercial banks remained at 0.25 percent, a move predicted by all 21 economists surveyed by Bloomberg. Governor Mark Carney repeated a commitment made in April to keep that rate unchanged through June 2010 unless the inflation outlook shifts.

“Growth in the second half of 2009 could be stronger than the bank projected in July,” the central bank said today in a statement from Ottawa. “Persistent strength in the Canadian dollar remains a risk to growth and to the return of inflation to target.”

The currency has gained 13 percent this year, straining an economy that is showing signs of recovering from its first recession since 1992. The domestic economy is being supported by “stimulative” monetary and fiscal policy, improved financial markets, higher commodity prices and improved business and consumer confidence, the central bank said today.

“It’s good news in that they are acknowledging the Canadian economy is improving,” said Charmaine Buskas, senior economics strategist at TD Securities in Toronto. “It doesn’t sound like they are increasingly concerned” about the currency.

Stronger Dollar

The Canadian dollar pared losses after the rate decision and was little changed at C$1.0791 per U.S. dollar at 4:09 p.m. in Toronto, from C$1.0785 yesterday. Earlier it declined by as much as 0.9 percent. One Canadian dollar buys 92.68 U.S. cents.

In July, the Bank of Canada said the economy would grow at a 1.3 percent annualized pace this quarter, ending a recession that began at the end of last year, and forecast fourth-quarter growth of 3 percent.

“Recent information on inventory adjustments and automotive production” suggests growth may exceed the bank’s earlier forecast, policy makers said in their statement, a switch from July when the bank cited a drag from industrial “restructuring.”

Toyota Motor Corp. said Aug. 28 it will shift production of Corolla cars from a California plant to one in Ontario. General Motors Co. said Aug. 18 it would boost production at a CAMI plant in Ontario that makes the Chevrolet Equinox and GMC Terrain.

The central bank’s July forecast assumed Canada’s dollar will average 87 U.S. cents through 2011.

Currency Outlook

The currency may reach parity by year-end, David Rosenberg, chief economist at Gluskin Sheff & Associates Inc. in Toronto, said in an interview. Gluskin Sheff, a wealth manager, oversees $4 billion.

The stronger currency makes exports less competitive. Canada recorded its first quarterly deficit in traded goods since 1976 between April and June, a gap of C$1.71 billion compared with a C$16.2 billion surplus in the year-earlier period. Canada recorded an unexpected C$1.43 billion trade deficit in July, Statistics Canada said today.

Companies such as Bombardier Inc. are cutting spending because they haven’t seen the effects of economic recovery.

“We have to operate our business prudently, make sure that we cut back on our costs in the recession,” Pierre Beaudoin, chief executive officer of Bombardier, said on a Sept. 2 earnings call. The Montreal-based company, the world’s third- biggest plane maker, plans to eliminate 1,200 positions in the next few months, leaving its workforce at about 4,360 people.

Flexible Policy

The central bank reiterated today it has “considerable flexibility” with monetary policy, even with the benchmark lending rate at the lowest since the central bank was founded in 1934. Policy makers announced no change today to its three emergency lending programs, after scaling them back in July as credit conditions improved.

The Bank of England and New Zealand’s central bank also kept their main lending rates at record lows today. The U.K. central bank said it also plans to keep buying as much as 175 billion pounds ($290 billion) of assets to cement the economy’s recovery, and New Zealand’s Reserve Bank said a strong currency threatens economic growth.

Canadian policy makers also said that domestic inflation and economic growth “evolved largely as expected” in the first half, and repeated that consumer price inflation will remain below the bank’s 2 percent target until the second quarter of 2011.

The bank’s commentary may influence debate when the country’s Parliament resumes Sept. 14. Liberal Leader Michael Ignatieff said last week he will try to force Prime Minister Stephen Harper’s Conservative Party government into early elections. Ignatieff has said Harper has mismanaged the economy and exacerbated the recession.

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net

Last Updated: September 10, 2009 16:32 EDT