Bank of Canada sticks to rate-hike message

Wed Sep 5, 2012 12:33pm EDT
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By Louise Egan and Randall Palmer

OTTAWA (Reuters) - The Bank of Canada doggedly stuck to the message on Wednesday that it may have to raise interest rates despite a global slowdown, predicting the domestic economy would gain momentum this year and next and inflation return to target within a year.

The central bank held its key overnight rate at 1 percent, as expected, extending a two-year freeze on borrowing costs. In 2010 it became the first Group of Seven country to lift rates from emergency lows following the recession.

But as the U.S. Federal Reserve and other global central banks contemplate further rounds of easing, Canada repeated on Wednesday what it has been saying for months - that the time for removing stimulus could be near.

"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, consistent with achieving the 2 percent inflation target over the medium term," the bank said in a scheduled policy announcement, using language identical to its last two rate statements.

The Canadian dollar trimmed losses against the U.S. dollar after the rate announcement. The currency strengthened to C$0.9874 versus the U.S. dollar, or $1.0128, shortly after the announcement. It was trading at C$0.9884, or $1.0117 just before the bank's statement.

There was no sign of backpedaling by Bank of Canada Governor Mark Carney even as he highlighted the weak U.S. recovery, the European debt crisis and decelerating growth in China and other emerging economies.

"(The bank) retains a hawkish bias, with really quite limited changes since July, so those that were expecting a significant shift and more dovish tone are going to be disappointed," said Camilla Sutton, chief currency strategist at Scotiabank.


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