Bank of Canada seen sticking to neutral pledge few see as credible

Tue Sep 2, 2014 8:06am EDT
 
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By Randall Palmer

OTTAWA (Reuters) - The Bank of Canada will likely repeat on Wednesday that it is just as likely to cut interest rates as raise them, but a growing number of market players see this so-called neutral stance as fiction designed to keep a lid on the currency.

In its last rate statement in July (bit.ly/1n4tq9q), the central bank said in July it was "neutral with respect to the timing and direction of the next change to the policy rate" but virtually no one believes there is actually a 50 percent chance of an actual rate cut.

A Reuters survey of 39 economists unanimously predicts the Bank of Canada will keep its overnight rate at 1 percent on Wednesday, and the median forecast is that it will bump it up in the third quarter of 2015. None foresees a cut.

Governor Stephen Poloz last year dropped the language of his predecessor, Mark Carney, suggesting the central bank's next rate move would be a hike when soft economic data made it clear no such move was imminent.

But CIBC World Markets chief economist Avery Shenfeld said Poloz's claim that the next move could be either up or down had "lost some credibility as growth, exports and core inflation all picked up."

The bank was avoiding conceding that a hike was probably much more probable than a cut in order not to strengthen the Canadian dollar CAD=, as a weaker currency would support exports, he said.

"To keep the currency on the defensive, it’s trying to remain more staunchly dovish than (U.S. Federal Reserve Chair) Janet Yellen," Shenfeld wrote in a note to clients.

Poloz, former head of Export Development Canada, has said that exports, followed by business investment, needed to take over from over stretched consumers as the leading drivers of growth.   Continued...

 
The Bank of Canada building is pictured in Ottawa June 1, 2010. REUTERS/Chris Wattie