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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.
"For markets, the inclination is going to be to pull forward rather than push back the probability of a rate hike out of the BoC given the better than expected economic and inflation performance," said Stewart Hall, markets strategist at HSBC Canada.
"Still, the overall market response has been largely muted in keeping with the limits of the information provided," he said.
Yields on overnight index swaps, which trade based on expectations for the Bank of Canada's key policy rate, edged higher after the speech was published, showing the market saw credit tightening as more likely than before Carney spoke.
The market suggests there are high odds the central bank will hike rates by 25 basis points in July and lift its key rate to 1 percent by October.
The Canadian dollar firmed slightly after the speech and news conference, rising to C$1.0234 to the U.S. dollar from about C$1.0250 just before.
Scotia Capital economist Derek Holt sees a second-quarter rate hike as probable and believes Carney carefully managed his message on Wednesday in an attempt to prevent markets from racing ahead of themselves.
"The danger on stimulus withdrawal is to have markets rapidly price in a full cycle's worth of hikes, and much of the messaging in this speech is oriented toward ensuring this is done in as mild a manner as feasible," Holt said.
More answers on the bank's intentions will come on April 22 when it updates it forecasts, two days after an interest rate announcement where it is expected to keep rates unchanged.
Core inflation was higher than expected in both February and January, but the one-time effects of higher hotel rates during the Winter Olympics in Vancouver had many wondering whether the central bank would shrug off the data.
Carney acknowledged some of the price pressures were transitory but said to stay tuned for more details in April.
In a sign of heightened market hunger for any hint from the bank, some found a veiled signal of an imminent rate hike in Carney's use of new language in describing the low rate pledge as "expressly conditional".
Carney downplayed the wording change but then said: "It's not a promise, it's an expectation. We'll update that in April and lay out that view in more detail."
Additional reporting by David Ljunggren and Toronto treasury team; editing by Peter Galloway