January 19, 2010 / 1:47 PM / 8 years ago

Bank of Canada seen holding rates, tweaking outlook

4 Min Read

(Repeats preview first run Jan 15 without changes)

WHAT: Bank of Canada interest rate announcement; Monetary

Policy Report (MPR)

WHEN: Tuesday, January 19 at 9 a.m. for rates

Thursday, January 21 at 10:30 a.m. for MPR

REUTERS FORECAST: All of the 11 primary dealers surveyed on Thursday forecast the Bank of Canada would stand pat on rates on Tuesday and most expect it to maintain its conditional commitment to keep the key overnight rate at its current 0.25 percent until the end of the second quarter. All see a rate hike at some point this year.

They put the median odds of the central bank intervening in currency markets over the next 12 months at 5 percent.

Factors to Watch:

Outlook:The rate statement may provide clues about the timing of the bank's first rate hike by flagging any revisions to its outlook on growth and inflation, to be explained in more detail in the MPR on Thursday. Economists expect upward tweaks to the growth and core inflation forecasts for the final quarter of 2009 and early 2010, but probably nothing substantial enough to knock the bank off its conditional commitment to hold rates steady through mid-year.

More dovish economists suspect the sluggish pace of recovery may lead the bank to estimate that inflation will reach its 2 percent target later than the third quarter of 2011, which was its forecast in October.

Overall, the bank will likely emphasize signs the global economy is improving but also that in the key economy affecting Canada's fate -- the United States -- serious risks remain. That uncertainty, combined with still considerable slack in the Canadian economy, means the recovery is not fully entrenched.

Dollar: The bank's tone on the strengthening Canadian dollar, which climbed to a three-month high on Thursday, is not seen varying from recent comments that it exerts a drag on growth. It may argue that at least part of the rise is justified by rising commodity prices. However, the bank could adopt more aggressive language about the risk to recovery posed by the exchange rate if the currency suddenly shoots up to near parity with the U.S. dollar before Tuesday.

Exit strategy: It is likely still too early for the bank to talk about the need to eventually withdraw economic stimulus measures, so any mention of it would be taken as a hawkish signal. Historically, after North American slowdowns, Canada has hiked rates earlier than the U.S. Federal Reserve only to have to reverse course later. Governor Mark Carney is likely reluctant to repeat that pattern because that could push the Canadian dollar up above the bank's comfort level.

Market Impact:

Substantial upward revisions to the bank's forecasts for growth and inflation would be likely to push the Canadian dollar closer to parity with the U.S. dollar and cause bond yields to rise as investors bet on an early rate hike. Similarly, any new language regarding the eventual need to withdraw stimulus could also boost markets.

Markets could be disappointed if the bank is unexpectedly dovish, emphasizing the downside risks to the economy or repeating that the risks are "tilted to the downside", especially if it leaves its forecasts unchanged or says it will take inflation longer than expected to reach the 2 percent target.

Reporting by Louise Egan; editing by Peter Galloway

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