Bank of Canada dims its rate-hike signal

Tue Jun 5, 2012 11:14am EDT
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By Randall Palmer and Louise Egan

OTTAWA (Reuters) - The Bank of Canada continued to signal it might have to raise interest rates on Tuesday but it softened its recent hawkish language a bit in reaction to a sharp deterioration in global financial conditions sparked by renewed fears about Europe.

The central bank kept its key overnight rate at a low 1 percent, saying that while an increase might still be needed, it would depend on the strength of economic growth.

"To the extent that the economic expansion continues and the current excess supply in the economy is gradually absorbed, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate...," the bank said.

Amid the deepening euro zone crisis, analysts had waited to see if and how the central bank might temper the language it used in its April 17 decision to keep its rate at a stimulative 1 percent. At that time the bank said a modest rate increase might become appropriate "in light of the reduced slack in the economy and firmer underlying inflation".

In the end, the market focused more on Tuesday on the fact that Governor Mark Carney still saw the possibility of higher rates than on the conditions he said would have to be in place before the bank raised them.

"This was an opportunity for Governor Carney to manage Street expectations. The Street has been suggesting a rate cut, or certainly bias for a rate cut, with respect to the futures market," said Jack Spitz at National Bank Financial.

"The market consensus was getting ahead of itself with respect to the next move being a cut, and he successfully scaled back those expectations. As a result we've seen a move higher for the Canadian dollar."

The Canadian currency strengthened to C$1.0383 against the U.S. dollar, or 96.31 U.S. cents, after the bank's statement from Monday's close of C$1.0397, versus the greenback, or 96.18 U.S. cents.   Continued...

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