What the Bank of Canada is considering next week

Fri Jul 11, 2008 4:32pm EDT
 
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OTTAWA (Reuters) - The Bank of Canada appears set to hold interest rates steady next Tuesday, giving itself more time to see how the U.S. economic saga unfolds while trying to prevent high inflation from taking hold in the country.

Canada's primary securities dealers forecast unanimously that the central bank would keep rates at its benchmark overnight rate at 3 percent this month and in September.

Investors will scour the statement that will accompany the rate announcement to see if Governor Mark Carney switches to a more hawkish tone or maintains a neutral stance on rates.

The statement could also contain new projections for inflation or growth because it comes two days before the bank releases an update to its April monetary policy report.

Below is a list of some factors the BoC's governing council will consider when it meets to set rates next week:

INFLATION

Inflation reached 2.2 percent in the 12 months through May on rising gasoline prices, while consumer prices rose 1.0 percent in May from April, the highest monthly rate since 1991. Core CPI, however, was a tame 1.5 percent. Core CPI excludes volatile items like gasoline and food.

The unforeseen spike in oil prices prompted the bank to forecast CPI inflation would rise above 3 percent later this year. Carney said in June the commodity price shock had prompted him to adopt a "relentless focus on inflation."

The bank may be concerned that inflation expectations are creeping higher. More than a third of business managers surveyed by the Bank of Canada in the second quarter thought inflation would push above 3 percent, the highest number ever for the survey.   Continued...

 
<p>Bank of Canada Governor Mark Carney waits to testify before the Commons finance committee on Parliament Hill in Ottawa April 30, 2008. REUTERS/Chris Wattie</p>