Bank of Canada keeps rate-hike talk, eyes fiscal cliff

Tue Dec 4, 2012 10:46am EST
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By Louise Egan and Randall Palmer

OTTAWA (Reuters) - Canada's central bank was unwavering on Tuesday in its view that it may need to hike interest rates, not cut them, even as the country's economy shows signs of slowing and uncertainty over the U.S. fiscal cliff shakes North American economic confidence.

Bank of Canada Governor Mark Carney - who will become head of the Bank of England in July - has held the overnight lending rate at 1 percent since September of 2010, the longest period of bank inactivity on rates since the early 1950s.

But that didn't stop the bank from repeating the wording for its rate outlook that it used in October to signal it is leaning towards tightening monetary policy. It is the only central bank in the Group of Seven wealthy nations to have that bias.

"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 a statement, using language identical to that it employed in its October 23 rate announcement.

The bank began talking about rate hikes starting in April of this year and in October Carney tweaked that message slightly to say a move was "less imminent", although the next move on rates would still be an upward one. Market players don't expect a hike until the fourth quarter of 2013.

There were no explicit signs in Tuesday's statement that the bank was preparing to turn dovish, at least for now.

"The key is that they're keeping word for word to the bias that they introduced in October," said Doug Porter, deputy chief economist at BMO Capital Markets.

"I think the real test for the bank and markets will be whether we do get a reversal in the economic data in the weeks ahead, or it continues to deteriorate, and I think that's going to determine whether they stick to that bias in early 2013," he said.   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