Bank of Canada may rethink rate-hike intentions

Fri Jun 1, 2012 3:54pm EDT
 
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By Louise Egan

OTTAWA (Reuters) - The Bank of Canada may signal on Tuesday that it is more reluctant to raise interest rates than it was seven weeks ago, without completely reversing its message that Canadians should start preparing for higher borrowing costs down the road.

In its last rate announcement on April 17, the central bank surprised markets with a warning that monetary tightening "may become appropriate", raising speculation it could start lifting its main policy rate from the current 1 percent as early as this fall.

But it may now be forced to gracefully backpedal because of the sputtering U.S. recovery and renewed turmoil in Europe, which the European Central Bank (ECB) and Bank of England (BOE) are watching closely.

"The Bank of Canada has to take a moderate step backward in its hawkish rhetoric as opposed to risking being the only hawkish central bank in a week in which the ECB could well cut, and each of the BoE and RBA (Reserve Bank of Australia) is likely to stand pat but with a dovish bias," said Derek Holt, economist at Scotiabank.

In fact, this is the second time in a year that the Bank of Canada Governor Mark Carney has set the stage for an eventual rate hike, only to be sideswiped soon after by an escalation of the European debt crisis.

NO RATE MOVE SEEN TUESDAY

The central bank's April 17 statement was reminiscent of a similar burst of optimism in May 2011, when it signaled intentions to tighten monetary policy. By October it had done a complete about-face.

The jury is still out on whether the bank's statement on Tuesday will soften the sentence on the withdrawal of stimulus, or leave it intact and instead flag increased worries about risks from abroad.   Continued...