Bank of Canada cautious over future rate hikes

Wed Oct 20, 2010 1:34pm EDT
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By David Ljunggren

OTTAWA (Reuters) - The Bank of Canada said on Wednesday it would have to consider any further rate hikes carefully, given the patchy global recovery, a weak U.S. outlook and expected curbs on Canadian growth.

The central bank, which held its benchmark rate steady at 1.0 percent on Tuesday after three consecutive increases, said in its latest Monetary Policy Report that there was still considerable monetary stimulus in place.

"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.

The language on factors affecting future rate hikes was identical to that in the rate statement issued on Tuesday.

The market is split over when the bank will next raise rates. Five of Canada's 12 primary dealers expect the bank to have raised rates at least once by March of next year, while one major research firm feels the next hike will not be until the end of 2011.

The central bank, which says the Canadian recovery will be weaker than it forecast in July, cut its forecast for annualized growth in the third quarter of 2010 to a tepid 1.6 percent from the 2.8 percent it had predicted in July.

It also cut quarterly forecasts for the subsequent four quarters, predicting greater-than-expected growth would only start in the fourth quarter of 2011. The economy was running below capacity and should return to full capacity by the end of 2012.

The bank said total and core inflation should rise to 2.0 percent by the end of 2012, and risks to the outlook were roughly balanced.   Continued...

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