Bank of Canada softens stance, rate hike still on horizon

Wed Mar 6, 2013 12:05pm EST
 
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By Louise Egan and Randall Palmer

OTTAWA (Reuters) - The Bank of Canada softened its stance on the need for interest rate hikes on Wednesday, saying it will likely hold its benchmark rate steady for "a period of time," but that its next move would still probably be a hike rather than a cut.

The central bank held its overnight lending target unchanged at 1.0 percent, where it has been since September 2010. It had been signaling for several months that it intends to raise the rate, but in January said such a move was "less imminent" and on Wednesday it took another step back.

"With continued slack in the Canadian economy, the muted outlook for inflation, and the more constructive evolution of imbalances in the household sector, the considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required, consistent with achieving the 2 percent inflation target," the bank said.

Its previous guidance did not include a reference to "continued slack" or to the "period of time" over which rates would likely stay on hold.

The Bank of Canada is alone among central banks of the Group of Seven leading industrialized nations to have a tightening bias.

But it is watering down that bias following the weakest six months of growth since the 2008-09 recession, which meant the Canadian economy underperformed the U.S. economy for the first time in seven years.

Central bank chief Mark Carney expects the economy to regain momentum through 2013, but Wednesday's figures offered evidence instead of continued weakness. The pace of purchasing activity in Canada slowed in February for the second straight month, according to Ivey Purchasing Managers Index data.

The seasonally adjusted index fell to 51.1 from 58.9 in January. Analysts polled by Reuters had expected a reading of 57.5.   Continued...

 
Buildings are seen in the financial district in Toronto, January 28, 2013. REUTERS/Mark Blinch