Canada holds rate unchanged, unlikely to move soon

Tue Oct 19, 2010 12:51pm EDT
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By David Ljunggren

OTTAWA (Reuters) - The Bank of Canada kept its benchmark interest rate unchanged at 1 percent, as expected, on Tuesday and cut growth forecasts, but surprised markets with a dovish statement suggesting rates will stay on hold.

The Canadian dollar fell to its lowest level in a month, on the growing feeling that the central bank, which raised rates three times in a row between June and September, would now keep them steady for some time.

"At this time of transition in the global recovery, with a weaker U.S. outlook, constraints beginning to moderate growth in emerging market economies, and domestic considerations that are expected to slow consumption and housing activity in Canada, any further reduction in monetary policy stimulus would need to be carefully considered," it said in a statement.

A Reuters poll of Canada's 12 primary securities dealers showed none expected a rate hike in December, but five predicted a raise in the first quarter of next year.

Based on a Reuters calculation, the market is pricing in an 95.19 percent chance rates will remain on hold at the December 7 rate decision.

The bank cut its 2010 growth forecast to 3.0 percent from the 3.5 percent it forecast in July, and cut its 2011 forecast to 2.3 percent from 2.9 percent. It raised its prediction for 2012 growth to 2.6 percent from 2.2 percent.

The Canadian dollar dropped to around C$1.0360 to the U.S. dollar, or 96.52 cents, from Monday's close of C$1.0141 to the U.S. dollar, or 98.61 U.S. cents. It later recovered slightly.

"This is not just a data-watching central bank that is keeping its powder dry in order to evaluate developments over coming months -- this is a central bank that has totally revised its outlook and market guidance," said Derek Holt and Gorica Djeric of Scotia Capital.   Continued...

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