Bank of Canada surprises with more rate-hike talk

Tue Oct 23, 2012 10:58am EDT
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By Louise Egan and Randall Palmer

OTTAWA (Reuters) - The Bank of Canada surprised markets on Tuesday by largely keeping a bias toward higher interest rates and issuing a fairly upbeat outlook on growth, adding for the first time that soaring household debt could justify eventual rate increases.

The central bank, which has held its key rate at 1.0 percent for two years, continued to use the hawkish language that has made it an outlier among the central banks of major economies. It softened its tone only slightly by making the timetable for rate hikes less definite.

The bank has frozen rates for two years but since April has defied the global trend by signaling plans to eventually tighten monetary policy.

Markets had been primed for softer language this week or even a shift into a neutral stance after a speech by Bank of Canada Governor Mark Carney last week that was seen as decidedly more dovish.

"All in all, the Bank of Canada continues to be one of the most hawkish central banks in the advanced economies," said Camilla Sutton, chief currency strategist at Scotiabank.

Previously, the bank had made rate hikes conditional on excess supply in the economy being absorbed, a way of saying growth in gross domestic product would have to be 2 percent or higher, a scenario which is seen as increasingly unlikely as growth slows.

That reference was dropped on Tuesday.

"Over time, some modest withdrawal of monetary policy stimulus will likely be required, consistent with achieving the 2 percent inflation target," the bank said in its rate statement.   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