March 1, 2011 / 2:27 PM / 7 years ago

Instant view: Bank of Canada gives no hint of next rate hike

TORONTO (Reuters) - The Bank of Canada kept its main interest rate unchanged at 1 percent on Tuesday and gave no signal it plans to push it up soon, saying underlying inflationary pressures remain subdued.

COMMENTARY:

PETER BUCHANAN, SENIOR ECONOMIST OF CIBC WORLD MARKETS

“Not really a great surprise at all. As far as the global economy, growth is proceeding in line with earlier projections. What they have done though is added a reference to geopolitical risk. So that obviously refers to the risk that oil prices will remain high as a result of unsettled conditions in the Middle East. Domestic recovery is proceeding slightly faster than they had expected ... They reiterated some earlier concerns, namely the high C$, Canada’s poor productivity performance, risks they pose for future strength in exports. On the policy side, what’s significant is they’ve noted that any further reduction in monetary policy will have to be carefully considered. That’s not different from what they said before, but it does suggest that they are going to proceed fairly cautiously. So a rate hike in April is not a 100 percent foregone conclusion. If anything, they will probably wait until the May meeting before they move off the fence and tighten policy further.”

“If oil prices remain high, that’s not necessarily such a bad thing for Canada’s economy, but certainly it’s not helpful to some of our key export markets like the U.S., so obviously they are concerned about that.”

PAUL FERLEY, ASSISTANT CHIEF ECONOMIST, ROYAL BANK OF

CANADA

“They slightly upgraded their outlook for the Canadian economy, acknowledging that the recovery has been proceeding slightly faster than expected.”

“However they still expressed concerns about challenges presented by persistent strength in Canadian dollar and Canada’s poor productivity performance.”

“On balance it suggests no imminent rate move.”

DAVID TULK, CHIEF CANADA MACRO STRATEGIST AT TD SECURITIES

“They stuck to the script of the January statement pretty closely. They did concede a slightly stronger Canadian outlook but nevertheless tempered that with a view that there’s still considerable excess capacity and that inflation is unfolding largely as expected. Any expectation of an April rate hike is I think a little bit premature and we are comfortable with our July forecast.”

“The dollar is certainly weakening. I think you’re seeing a little bit of giveback in some of the (yield curve) short end but mostly it’s a Canadian dollar story at this point.”

MARKET REACTION:

- The Canadian dollar eased to C$0.9730 to the U.S. dollar, or $1.0277, down from its preannouncement level at C$0.9714, or $1.0294, which was also Monday’s North American close.

- Money market rates and bond yields fell slightly after the rate announcement. The yield on the rate sensitive two-year Canadian government bond slipped to 1.842 percent, down from 1.858 percent just before the statement.

- Overnight index swaps, which trade based on expectations for the key central bank rate, showed investors see an 86.49 percent probability rates will stay on hold April 12, unchanged from before the statement. But beyond April swaps traded to reflect a reduced probability of rate hikes.

Reporting by Claire Sibonney, Ka Yan Ng and Solarina Ho; Editing by Jeffrey Hodgson

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