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* Bank of Canada holds rate steady at 1 percent
* C$ at C$0.9878, or $1.0124
* Short-term bond yields lower (Updates with details, comments)
TORONTO, Jan 18 (Reuters) - The Canadian dollar came off a 2-1/2 year high against the greenback on Tuesday after the Bank of Canada issued a dovish statement on its policy outlook along with its much anticipated decision to keep interest rates steady at 1 percent.
At 9:37 a.m. (1437 GMT), the Canadian dollar CAD=D4 was at C$0.9878 to the U.S. dollar, or $1.0124, recovering from a low of C$0.9911 to the greenback, or $1.0090, hit immediately after the bank's announcement. The currency was at C$0.9867, or $1.0135, before the decision. It was down on the day.
The central bank held its overnight lending target steady for the third straight time after raising rates three times between June and September 2010. [ID:nBCLICE72Q]
It nudged economic growth forecasts for 2011 and 2012 higher to reflect the strength of the global economic recovery, but said that further reductions in its monetary policy stimulus would need to be carefully considered.
"I would think it would push off some of the bets in the market that the Bank of Canada is going to hike (rates) sooner rather than later, so I would expect a bit of the tone in the market to ease up on the Canadian dollar," said Derek Holt, an economist at Scotia Capital.
Short-term money market rates and bond yields eased after the rate announcement. The yield on the rate sensitive two-year Canadian government bond CA2YT=RR was 1.768 percent, down from the 1.792 percent just before the statement. <0#CABMK=>
Overnight index swaps, which trade based on expectations for the key central bank rate, showed investors see an 83.23 percent probability rates will stay on hold March 1, compared with 72.85 percent before the statement. BOCWATCH
($1=$0.99 Canadian) (Reporting by Solarina Ho; editing by Peter Galloway)