06/05/2012 09:19 EDT | Updated 08/05/2012 05:12 EDT

Loonie rises, Bank of Canada leaves rates unchanged, leaves door open to hike

TORONTO - The Canadian dollar closed higher Tuesday as the Bank of Canada left its key rate unchanged at one per cent amid a decidedly negative economic outlook.

But the central bank still left the door open for rate hikes down the road.

The loonie closed up 0.16 of a cent to 96.34 cents US as the central bank observed that the outlook for global economic growth has weakened in recent weeks.

It said a sharp deterioration in global financial conditions is taking place because of a worsening European government debt crisis, which has spread recently to the Spanish banking sector.

The wording of the last announcement in April encouraged speculation that the Bank of Canada was set to start raising rates from its current one per cent level later this year. A faltering global economy and increasing worries about the eurozone debt crisis have dampened such an outlook.

"It kept in the statement that rate hikes 'may' be required, but added a conditional prelude to that call, saying that it would do so 'to the extent that the economic expansion continues and the current excess supply in the economy is gradually absorbed',” observed a commentary from CIBC World Markets.

"The message is that the bank, unlike the market, still expects the next move to be a hike, but it is acknowledging that there is less certainty about the economy being strong enough to warrant that move."

The commodity-sensitive loonie was also lifted by higher oil and gold prices.

The July crude contract on the New York Mercantile Exchange gained 31 cents to US$84.29 a barrel.

Copper prices declined while the July contract dipped two cents to US$3.29 a pound. Bullion prices improved, up $3 to US$1,616.90 an ounce.

Meanwhile, the European debt crisis continued to attract traders' attention as worries shifted to the health of the Spanish bank sector.

Finance ministers and central bank governors from seven of the world’s main economies — including Canadian Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney — held a conference call Tuesday to discuss the debt crisis.

And although Flaherty’s office in Ottawa released a statement it did not provide details of any pledge from European leaders.

However, Japan’s finance chief Jun Azumi reportedly said that the European members in the call pledged to “speed up their efforts” to contain the crisis.

The country’s banks are weighed by toxic loans following the implosion of the country’s real estate sector in the wake of the 2008 financial collapse.

Those banks may force the country to seek a bailout. Spain, strapped for cash, might have to tap European Union rescue funds, but it is reluctant to do so because such aid would come with strict conditions.

Spain has been forced to pay ever higher amounts of interest to attract buyers for its debt with the yield on the country’s 10-year bond up 0.02 of a point to 6.42 per cent before later settling down to 6.31 per cent.

Spanish Treasury Minister Cristobal Montoro on Tuesday said that given current borrowing costs, financial markets had effectively shut out the country.

He also claimed the amount of money needed to prop up Spain’s troubled banking sector is not excessively high but said the question was where the money would come from. And he repeated the country’s calls for the European Union to move faster towards establishing a banking union that would allow ailing lenders to seek help without governments intervening.