Bank of Canada raises rates, sees recovery slowing

Tue Jul 20, 2010 1:31pm EDT
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By Louise Egan and Ka Yan Ng

OTTAWA (Reuters) - The Bank of Canada raised its key interest rate on Tuesday, as expected, but warned the domestic and global recovery will be slower than it had previously forecast, suggesting any further hikes may be gradual.

The central bank became the first in the Group of Seven advanced economies last month to raise rates from the emergency lows introduced during the global financial crisis. It took a second step on Tuesday, lifting the rate 25 basis points to 0.75 percent.

Canada's blistering growth rate and job gains had led to widespread expectations of another rate hike, putting the Bank of Canada leagues ahead of the U.S. Federal Reserve and other G7 central banks, which are not yet ready to end the era of easy money.

But the hawkish stance on rates contrasted sharply with the dovish outlook in the accompanying statement, leaving markets in suspense about the bank's next move. It shaved its growth forecast for the Canadian economy this year to 3.5 percent from 3.7 percent and said Europe's bid to wrestle down sovereign debt would pinch the pace of the global rebound.

"Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments," the bank said in its announcement.

The lack of guidance on rates was identical to language used in its June 1 rate hike announcement.

In a Reuters poll conducted after the rate announcement, all 12 of Canada's primary securities dealers predicted another quarter-point increase on September 8 but most expected a pause in the tightening cycle in either October or December.

That puts Canada in the same basket as other commodity exporters such as Brazil, which is seen raising interest rates on Wednesday but pausing soon on signs that strong growth is cooling.   Continued...

<p>The Bank of Canada building is pictured in Ottawa June 1, 2010. REUTERS/Chris Wattie</p>