Bank of Canada sets stage for next rate hike

Tue Jul 19, 2011 11:34am EDT
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By Louise Egan and Randall Palmer

OTTAWA (Reuters) - The Bank of Canada signaled on Tuesday it was closer to raising interest rates as the domestic economy advances despite threatening economic developments in the United States and Europe.

The central bank held its key overnight rate at 1.0 percent, as expected, but said core inflation will reach the bank's 2 percent target earlier than anticipated and that economic growth will speed up in the second half of this year after a second-quarter slump.

In a statement, it removed a reference to monetary stimulus being "eventually withdrawn", used in its May 31 rate statement, suggesting a move was in the not-too-distant future.

"To the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be withdrawn, consistent with achieving the 2 percent inflation target," the bank said.

Canada became the first of the Group of Seven advanced economies to tighten monetary policy following the global financial crisis, raising rates three times from June to September last year.

The central bank has paused since then, with an eye on threats from abroad such as the weakening U.S. economy and the European sovereign debt crisis, which could slow growth at home.

The bank's comments on Tuesday were more hawkish than markets expected, pushing the Canadian dollar to a 2-1/2 month high against the U.S. dollar.

"There is a vague shift in the tone of the statement, toward slightly more hawkish," said Camilla Sutton, chief currency strategist at Scotia Capital.   Continued...

<p>Bank of Canada Governor Mark Carney leaves his office for a news conference upon the release of the Monetary Policy Report in Ottawa January 19, 2011. REUTERS/Chris Wattie</p>