Bank of Canada sounds warning over loonie's rise

The Bank of Canada left a key lending rate unchanged on Thursday, but sounded a warning over the recent rise in the Canadian dollar.

The central bank kept the overnight rate steady at 0.25 per cent where it said back in April it will remain until the middle of 2010 to help boost the economy.

The bank said the rise in the looniewhich hasgone from 79 cents on April 1 toabove 90 cents US, with many economists predicting a return to parity with the U.S. dollar threatens some of the positive factors in the Canadian economy.

"In recent weeks, financial conditions and commodity prices have improved significantly, and consumer and business confidence have recovered modestly," the bank said.

"If the unprecedentedly rapid rise in the Canadian dollar (which reflects a combination of higher commodity prices and generalized weakness in the U.S. currency) proves persistent, it could fully offset these positive factors,"the bank said.

The economy, the central bank said, is undergoing major restructuring in a number of sectors.

"The already significant output gap will continue to widen through the third quarter, putting downward pressure on inflation," thebank said, adding itcontinues to expect that the global and Canadian recoveries will be more muted than usual.