Bank of Canada reasserts rate stance, markets wary

Wed Mar 24, 2010 4:48pm EDT
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By Louise Egan

OTTAWA (Reuters) - Canadian growth and inflation are firmer than expected, Bank of Canada Governor Mark Carney said on Wednesday, but he highlighted other factors that could discourage the bank from raising interest rates earlier than expected to cool the economy.

After giving a speech perceived as slightly more hawkish on raising rates, Carney held a news conference in which he sought to dampen any market expectations that he could raise borrowing costs as early as June.

When the bank cut its key rate to 0.25 percent last April, it took the unusual step of committing to hold rates at that level until the end of June this year, conditional on inflation staying on track.

It has repeated that pledge at every chance but some investors began to suspect a bias toward an earlier rise in rates due to stubbornly firm core inflation and a string of surprisingly strong economic indicators.

Carney said the big picture was unfolding largely as expected, or only slightly stronger, and that people should not overreact to his comments.

"People should just take a step back, there hasn't been a fundamental change in the underlying dynamics here and those dynamics are pretty broad brushed," Carney told reporters.

"The underlying dynamics affecting inflation haven't changed, including the starting point which is an economy with a fair degree of slack in it, a considerable degree in it, both in the labor market and capacity in general," he said.

Nonetheless, markets were pricing in a slightly greater chance of credit tightening than before Carney spoke.   Continued...

<p>Bank of Canada Governor Mark Carney pauses during a speech in Ottawa March 24, 2010. REUTERS/Blair Gable</p>