Bank of Canada still eyes rate hike, sees jobs slack

Thu Oct 4, 2012 10:52am EDT
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By Rod Nickel

WINNIPEG, Manitoba (Reuters) - The Bank of Canada is still looking at the possibility of raising interest rates, but also believes there is some slack in the labor market that has not been taken up by the recovering economy, a top official said on Thursday.

In a speech to a business audience in Winnipeg, Manitoba, Tiff Macklem, senior deputy governor of the Bank of Canada, kept up the hawkish tone on rates the bank first adopted in April.

"To the extent that the economic expansion continues and the excess supply in the economy is gradually absorbed, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the 2 percent inflation target over the medium term," he said, using language almost identical to the bank's September 5 rate announcement.

The Bank of Canada has held its key overnight rate target at 1 percent since mid-2010, but this year it resumed signaling its intention to tighten policy, in contrast to the stance of U.S. and European central banks. The Canadian economy has recovered more quickly from the 2008-09 recession than its Western peers.

The Canadian dollar rose to C$0.9834 to the U.S. dollar, or $1.0169 after Macklem's comments. It closed at C$0.9881 to the U.S. dollar, or $1.0120, on Wednesday.

Most of Canada's primary dealers expect the bank to hold rates steady until the second half of 2013 because of pressures from the troubled European and U.S. economies and slowing Chinese growth. No change is expected at the bank's next rate announcement date on October 23.

Traders are more skeptical. Yields on overnight index swaps, which trade based on expectations for the central bank's main policy rate, are pricing in only a modest chance of a hike late next year.


The Bank of Canada's Senior Deputy Governor Tiff Macklem talks to Reuters in Montreal, October 5, 2010. REUTERS/Shaun Best