Bank of Canada says next rate move not certain

Thu Jul 22, 2010 2:40pm EDT
 
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By Louise Egan and Ka Yan Ng

OTTAWA (Reuters) - The Bank of Canada kept its rate hike options open on Thursday amid doubts about the world economic recovery.

Speaking two days after the bank nudged rates higher for the second time in six weeks, Governor Mark Carney said he shared the view from the U.S. Federal Reserve that the world economic outlook is unusually uncertain.

"Risks around the projection are elevated and there is no preordained path for interest rates in this country," Carney told reporters after the bank released its quarterly report of monetary and economic forecasts.

The report stated explicitly for the first time that its outlook assumes "a gradual reduction in monetary stimulus consistent with achieving the inflation target." But the bank also bumped domestic growth forecasts down.

That the bank will continue tightening is no surprise, given torrid growth in late 2009 and early this year that led it to twice hike rates by 25 basis points -- once on June 1 and again on Tuesday. Its key interest rate is now 0.75 percent.

But investors wonder whether it will dare raise rates a third time on September 8. As well as cutting quarterly growth forecasts for 2010 on Thursday, the bank said the recovery will be more protracted than it had expected due to the European debt crisis and a soft U.S. recovery.

"The direction of rates seems clear. The unknown remains the relative steepness of the Bank of Canada's rate escalation ladder," said Stewart Hall, economist with HSBC Canada.

Canada's growth streak and rate hikes contrast sharply with the situation in the United States, where Fed Chairman Ben Bernanke says he is ready to ease monetary policy further if the budding economic recovery withers.   Continued...

 
<p>Bank of Canada Governor Mark Carney speaks during a news conference upon the release of the Monetary Policy Report in Ottawa July 22, 2010. REUTERS/Chris Wattie</p>