Markets to eye Bank of Canada tightening language

Fri Aug 31, 2012 4:22pm EDT
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By Randall Palmer

OTTAWA (Reuters) - The market will again look beyond the Bank of Canada's expected decision on September 5 to keep its main policy rate at 1 percent, and instead focus on whether Governor Mark Carney will change the message that the central bank may need to hike rates.

The fact that Carney repeated the tightening language as recently as a speech on August 22, just two weeks before the coming announcement, suggests he may leave the formula unchanged.

"To the extent that the economic expansion in Canada 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," Carney said in the speech.

He used those exact words in the central bank's decisions on June 5 and July 17, and while he acknowledged on August 22 that recent data has been soft, he also said the underlying momentum was roughly in line with the growth of the economy's potential.

Second quarter growth came in on Friday exactly as the central bank had forecast in July, at an annualized 1.8 percent and higher than markets expected, though a good portion was attributable to a less-than-helpful increase in inventories.

The fact the data was in line with the central bank forecast provides "exactly zero reason for the Bank to shift from its mild tightening bias," Benjamin Reitzes, senior economist with Bank of Montreal, wrote in a note to clients.

A Reuters survey of 40 forecasters showed none expect a rate change on September 5. The median prediction is for a rate hike in the second quarter of next year.<CA/POLL>

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.   Continued...

A sign framed by maple leaves is pictured in front of the Bank of Canada building in Ottawa July 17, 2012. REUTERS/Chris Wattie