WINNIPEG (Reuters) - The Bank of Canada will assess whether it needs to keep interest rates at near-record lows as the economy continues to grow, a senior official said on Monday, raising the prospect that a rate hike could come sooner than anticipated and lifting the Canadian dollar.
The change in tone for the central bank, which said earlier this year rate cuts remained on the table, sent the Canadian dollar CAD= to its strongest level against the greenback since April 18.
In the bank’s most upbeat comments on the economy, Senior Deputy Governor Carolyn Wilkins said first-quarter growth was “pretty impressive,” while there were encouraging signs growth was broadening.
“As growth continues and, ideally, broadens further, Governing Council will be assessing whether all of the considerable monetary policy stimulus presently in place is still required,” Wilkins told a business audience.
Wilkins said Canada had largely adjusted to a drop in oil prices LCOc1 CLc1 that prompted the bank to cut rates twice in 2015, to 0.50 percent, to bolster the economy, which slipped into a brief recession.
The speech’s hawkish tone is the first acknowledgement from the bank that the next move is likely to be a hike, said Royce Mendes, senior economist at CIBC Capital Markets.
The bank makes its next rate decision on July 12. While many economists had expected the bank to start raising in 2018, markets were pricing in a 52 percent chance of a hike by the end of 2017 following Wilkins’ speech.
“It looks as though the bank is looking to shift gears,” said Benjamin Reitzes, senior economist at BMO Capital Markets.
“There’s a decent chance that if things go right over the next few months, rate hikes could be coming sooner than everybody thought.”
Wilkins acknowledged tax and trade policies in the United States will likely remain an important uncertainty in the bank’s outlook and it will be difficult to gauge the impact without more information.
She added, “life goes on and decisions must be made in the meantime.”
Even if only a few sectors were expanding enough to absorb excess capacity, the bank would need to take the appropriate monetary policy action to meet its 2 percent inflation target, she said.
Inflation is currently at 1.6 percent, thanks in part to slack in the economy, Wilkins said. She noted other indicators also point to ongoing spare capacity, including only moderate growth in wages.
Reporting by Rod Nickel; Writing by Leah Schnurr and David Ljunggren in Ottawa; Editing by Dan Grebler and James Dalgleish