April 11, 2016 / 7:02 PM / a year ago

Bank of Canada seen talking up risks to keep lid on Canadian dollar rebound

Bank of Canada Governor Stephen Poloz speaks during a news conference in Ottawa, Canada, January 20, 2016. REUTERS/Chris Wattie

TORONTO (Reuters) - Bank of Canada Governor Stephen Poloz is expected to talk up economic risks and play down signs of stronger growth when the central bank sets interest rates on Wednesday, anxious to keep a recovering currency from choking off exports.

The central bank is widely expected to keeping rates on hold on Wednesday even as it raises growth forecasts to incorporate a stronger-than-expected start to the year and major stimulus spending in the first budget from Canada’s new Liberal government. [CA/POLL]

While Poloz has repeatedly said it is up to the market to set the Canadian dollar’s level, economists said he is aware a more cautious tone would keep the currency in a sweet spot that fosters exports and extends the recovery from last year’s shallow recession.

“Most of their communication will try to keep the Canadian dollar from strengthening,” said Hosen Marjaee, senior managing director, Canadian fixed income at Manulife Asset Management.

The Canadian dollar hit a 12-year low in January - helping to boost non-resource exports and offset the shock of tumbling oil prices - but has strengthened 14 percent since then.

The Bank of Canada is expected to bump up its forecast for economic growth in 2016 from the anemic 1.4 percent forecast in January to closer to 2.0 percent, said Mark Chandler, head of Canadian fixed income and currency strategy at RBC Capital Markets.

But even as it projects stronger growth at home, it should point to global risks and signs of weakness in the United States, said David Rosenberg, chief economist & strategist at Gluskin Sheff & Associates.

“They can’t ignore the fact that the U.S. economy has slowed to stall speed after what was already tepid growth in the fourth quarter,” said Rosenberg.

Both Rosenberg and Chandler expect the Bank to use the output gap - the difference between its estimate of the economy’s capacity and how much is actually being used - as a way to rein in expectations for tighter monetary policy and keep the Canadian currency in check.

By holding to its forecast that Canada will not take up all the slack in the economy until the end of 2017, the central bank would signal the economy is still a long way from overheating and interest rates will not rise anytime soon.

Like other major central banks it believes in “lower for longer,” said Rosenberg.

Additional reporting by Fergal Smith in Toronto and Leah Schnurr in Ottawa; Editing by Andrew Hay

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