Bank of Canada sticks to rate hike talk, cuts outlook

Tue Jul 17, 2012 11:46am EDT
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By Randall Palmer and Louise Egan

OTTAWA (Reuters) - The Bank of Canada left interest rates unchanged on Tuesday, but made clear it was still weighing an eventual move higher, even as other central banks ease monetary policy to cope with damaging economic slowdowns.

The bank repeated mildly hawkish interest rate language it used in June, surprising many economists who thought it would dilute or possibly even eliminate talk of possible higher rates because of slower growth and worse global prospects.

But the rest of the statement was peppered with more downbeat economic predictions that suggested any rate hike would be a good ways down the road.

"To the extent that the economic expansion continues and the current excess supply in the economy is gradually absorbed, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate," it said, as it kept its main policy rate at 1 percent.

While the bank made clear it is looking to tighten policy, it lowered growth forecasts for this year and next. It said the economy will not reach full capacity till the second half of 2013, not the first half as it had thought in April.

TD Securities chief Canada macro strategist David Tulk said the bank now seemed completely on hold, though with a bias to take rates higher at some point.

"They're really trying to send a message to the market that pricing in cuts is an unwise suggestion," said Tulk.

Though analysts polled by Reuters on July 11 unanimously forecast the central bank's next move would be up, overnight index swaps -- even after Tuesday's decision -- point to the next move being down.   Continued...