July 13, 2012 / 9:05 PM / 6 years ago

Investors eye Bank of Canada's tightening bias

OTTAWA (Reuters) - Analysts unanimously expect the Bank of Canada to hold its main policy rate at 1 percent on July 17, but the real focus will be on whether it will repeat, dilute or omit the message that it may soon need to raise the rate.

Currently, the central bank is the only one in the Group of Seven (G7) leading industrialized countries with a tightening bias, which it has maintained in the face of a dreary economic and financial picture in Europe and elsewhere.

In its April rate decision, the central bank said “some modest withdrawal of the present considerable monetary policy stimulus may become appropriate” in light of the reduced economic slack and firmer underlying inflation.

It softened this stance slightly in June, still saying such a withdrawal of stimulus may become appropriate, but qualifying the statement by adding “to the extent that the economic expansion continues and the current excess supply in the economy is gradually absorbed”.

The question now is whether the bank will temper that position further, or possibly even eliminate any mention of it.

David Madani at Capital Economics thinks more monetary and fiscal support, not less, might actually become necessary at some point, but he doesn’t see the bank dropping the language on withdrawing stimulus quite yet.

“Although the Bank of Canada is expected to sound more downbeat about global economic growth prospects, it probably wants more confirmation of the global slowdown before dropping its key policy sentence about the removal of policy stimulus,” Madani said in a note to clients.

Bank of Montreal deputy chief economist Doug Porter sees a strong case to shift back to neutral. His arguments are:

- almost every major central bank has eased policy due to slower global growth

- the economy likely grew at less 2 percent in the first half, less than the bank’s forecast of 2.5 percent

- new and tighter mortgage rules help ease the biggest domestic concern, which is the high level of household debt.

Porter added this caveat, however: “The case for keeping the bias is that it is already very mild, and the bank doesn’t want to be seen flip-flopping.”

A Reuters poll of 44 global forecasters on Wednesday showed each one expects the bank’s next rate move to be a hike, but the median forecast was that it will not take place until the second quarter of 2013, three months later than the median forecast in a survey taken at the end of May. And some respondents said they don’t see a hike before 2014.

The Bank of Canada’s overnight rate has been at 1 percent since September 2010. The bank was the first central bank in the G7 to tighten policy after the last recession, before freezing rates in response to the European debt crisis.

As recently as last month, bank Governor Mark Carney said that despite the debt crisis in Europe, Canada’s economy continued to grow and absorb slack, with resilient household spending supported by very low interest rates.

Yet traders in the overnight index swap market continue to point to a rate cut rather than a rise.

The bank is expected to downgrade its growth forecast, giving a broad picture on Tuesday and then more detail on Wednesday in its Monetary Policy Report, due at 10:30 a.m. EDT (1430 GMT).

Reporting by Randall Palmer; Editing by Peter Galloway and Jeffrey Hodgson

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