Canada lifts interest rates to defend plunging dollar

Canada was forced to raise interest rates yesterday as the Canadian dollar became the latest currency to plunge into crisis. A sharp rise in industrial production in America strengthened expectations of another rise in rates, which would compel th e Bankof Canada to act again.

The Canadian dollar plunged to a nine-year low after an interview by Al Friedberg, a well-known local currency trader and founder of Toronto's Friedberg Mercantile Group, in a morning paper. Mr Friedberg said the Canadian currency faced a "massive crisis", and compared the state of the economy to Britain in the 1970s.

Intervention by the Bank of Canada and, reportedly, by the Bank of England, failed to stabilise the diving currency, which reached a low of $1.4234. The Bank of Canada raised interest rates by half-a-point to 6.75 per cent. Paul Martin, Finance Minister,tried to reassure financial markets, saying the government would resolve its debt crisis. "We're going to solve our problems. It's very clear that we're going to clean up the public finances. There's no question about that," he said.

Canadian officials also confirmed that finance ministers of the Group of Seven industrial countries would meet next month to discuss the tempestuous state of global financial markets, as the Independent reported last week.

Mr Martin's remarks met with some scepticism. Steve Barrow, currency analyst at Chemical Bank in London, said: "Canadian governments have consistently not done enough on the fiscal front. They are paying for their past failures."

The Canadian exchange rate has been under pressure for more than a week as investors became concerned about the ability of all countries with high government deficits to service debt. Interest payments alone on the government's debt could reach C$55bn next year.

Bonds and shares fell in value. The yield on long-term government bonds rose above 9 per cent. The currency came to settle by midday at $1.4205.

Mark Cliffe, international economist at HSBC Markets, said: "Canadian debt is widely held internationally. It makes the currency very vulnerable in this unsettled climate."

Analysts said more Canadian interest rate rises would be needed. Ted Carmichael, of JP Morgan in Toronto, predicted rates above 9 per cent by mid-year due to the need to follow US interest rate moves.

The next rise in rates in the US is likely to come early next month, after publication of figures showing industrial production jumped 1 per cent in December. It was the biggest monthly increase since December 1992, and took the year-on-year rate of growth in output to 5.8 per cent. Capacity utilisation passed 85 per cent, regarded as an inflationary milestone.

Almost all industries displayed continuing and unexpected buoyancy, but mining and manufacturing were particularly strong. Mild weather had depressed energy output.