Investors eye Bank of Canada's tightening bias

Fri Jul 13, 2012 5:04pm EDT
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By Randall Palmer

OTTAWA (Reuters) - Analysts unanimously expect the Bank of Canada to hold its main policy rate at 1 percent on July 17, but the real focus will be on whether it will repeat, dilute or omit the message that it may soon need to raise the rate.

Currently, the central bank is the only one in the Group of Seven (G7) leading industrialized countries with a tightening bias, which it has maintained in the face of a dreary economic and financial picture in Europe and elsewhere.

In its April rate decision, the central bank said "some modest withdrawal of the present considerable monetary policy stimulus may become appropriate" in light of the reduced economic slack and firmer underlying inflation.

It softened this stance slightly in June, still saying such a withdrawal of stimulus may become appropriate, but qualifying the statement by adding "to the extent that the economic expansion continues and the current excess supply in the economy is gradually absorbed".

The question now is whether the bank will temper that position further, or possibly even eliminate any mention of it.

David Madani at Capital Economics thinks more monetary and fiscal support, not less, might actually become necessary at some point, but he doesn't see the bank dropping the language on withdrawing stimulus quite yet.

"Although the Bank of Canada is expected to sound more downbeat about global economic growth prospects, it probably wants more confirmation of the global slowdown before dropping its key policy sentence about the removal of policy stimulus," Madani said in a note to clients.

Bank of Montreal deputy chief economist Doug Porter sees a strong case to shift back to neutral. His arguments are:   Continued...