CORRECTED-UPDATE 2-Bank of Canada chief: policy shift had small C$ impact

Tue Oct 29, 2013 7:36pm EDT
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(Corrects headline and first paragraph. The Bank of Canada said Poloz was referring to the change in the Canadian dollar, not in monetary policy when he spoke of "not a very significant change.")

By Louise Egan

OTTAWA Oct 29 (Reuters) - The Canadian dollar did not weaken significantly after the Bank of Canada abandoned 18 months of warning about higher interest rates last week in response to low inflation and a weak economy, central bank head Stephen Poloz said on Tuesday.

Poloz told a parliamentary committee that in setting interest rates last week the bank heightened its focus on the fact that inflation has been persistently below its 2 percent target.

"In that context we decided that we should no longer have an explicit bias toward higher interest rates," he said. "In that context it's true that markets have digested that and have sold the Canadian dollar a little, but it's not a very significant change."

Canada's central bank was the first to tighten monetary policy following the 2008-09 global financial crisis, raising its key overnight rate three times in mid-2010 and holding the rate at 1.0 percent since then.

The central bank held the rate unchanged last week, but surprised markets by signaling its next move could just as well be a rate cut as a hike, effectively ending the mildly hawkish stance it had held since April 2012 and nudging the Canadian dollar to a one-week low.

Poloz said he saw little risk of the bank overshooting its inflation target due to easy monetary policy. Canadian consumer prices rose 1.1 percent in September and the bank only expects inflation to climb back to 2 percent by the end of 2015.

Canada's primary securities dealers surveyed by Reuters after the bank's rate decision forecast the bank would not raise rates until the second quarter of 2015, six months later than they predicted previously.   Continued...