September 2, 2014 / 12:12 PM / in 3 years

Bank of Canada seen sticking to neutral pledge few see as credible

The Bank of Canada building is pictured in Ottawa June 1, 2010.Chris Wattie

OTTAWA (Reuters) - The Bank of Canada will likely repeat on Wednesday that it is just as likely to cut interest rates as raise them, but a growing number of market players see this so-called neutral stance as fiction designed to keep a lid on the currency.

In its last rate statement in July (bit.ly/1n4tq9q), the central bank said in July it was "neutral with respect to the timing and direction of the next change to the policy rate" but virtually no one believes there is actually a 50 percent chance of an actual rate cut.

A Reuters survey of 39 economists unanimously predicts the Bank of Canada will keep its overnight rate at 1 percent on Wednesday, and the median forecast is that it will bump it up in the third quarter of 2015. None foresees a cut.

Governor Stephen Poloz last year dropped the language of his predecessor, Mark Carney, suggesting the central bank's next rate move would be a hike when soft economic data made it clear no such move was imminent.

But CIBC World Markets chief economist Avery Shenfeld said Poloz's claim that the next move could be either up or down had "lost some credibility as growth, exports and core inflation all picked up."

The bank was avoiding conceding that a hike was probably much more probable than a cut in order not to strengthen the Canadian dollar CAD=, as a weaker currency would support exports, he said.

"To keep the currency on the defensive, it’s trying to remain more staunchly dovish than (U.S. Federal Reserve Chair) Janet Yellen," Shenfeld wrote in a note to clients.

Poloz, former head of Export Development Canada, has said that exports, followed by business investment, needed to take over from over stretched consumers as the leading drivers of growth.

But he has rejected suggestions he favors a weaker currency, saying the exchange rate is determined by markets and it is the central bank's job to target inflation.

Yet the bank's tone does influence markets, and TD Securities chief Canada macro strategist David Tulk said the bank did not want to sound unnecessarily upbeat for now.

"You sound too optimistic at this point, and the Canadian dollar screams higher, and that hurts your export sector, and (if) rates (were) back up, that undermines your housing sector, and then you're in the tough position of not having assurance of growth," he said.

Royal Bank of Canada assistant chief economist Dawn Desjardins sees a likely reintroduction of a tightening bias in October or December, particularly if U.S. economic growth continues and exports keep growing.

"This pickup we've seen in external demand, very much related to what we're seeing south of the border in terms of their growth, it does suggest that keeping a neutral stance isn't really going to be necessary," she said.

Desjardins said, however, that Poloz seems to want to be convinced that the pickup in exports is more than a one-quarter phenomenon.

Editing by Jeffrey Hodgson; Editing by Jonathan Oatis

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