September 27, 2017 / 4:20 PM / a year ago

Dovish Bank of Canada signals rate pause after back-to-back hikes

ST. JOHN’S, Newfoundland (Reuters) - There is no predetermined path for Canadian interest rates and the central bank’s next move will depend on incoming data, Bank of Canada Governor Stephen Poloz said on Wednesday in a speech that suggested a third rate hike is not imminent.

FILE PHOTO: Bank of Canada Governor Stephen Poloz takes part in a news conference in Ottawa, Ontario, Canada, July 12, 2017. REUTERS/Chris Wattie/File Photo

Striking a cautious note and listing uncertainties facing Canada’s economy, Poloz said the central bank will closely watch movements in longer-term interest rates and the exchange rate as it considers how to follow its two recent rate hikes.

“Monetary policy will be particularly data-dependent in these circumstances and, as always, we could still be surprised in either direction,” Poloz said in prepared notes for a speech to the St. John’s Board of Trade.

“We will continue to feel our way cautiously as we get closer to home, fostering economic growth and keeping our inflation target front and center,” Poloz added.

The dovish tone sent economists scrambling to revise expectations for the next rate hike, which some had predicted would come as early as October, and the Canadian dollar weakened to a near four-week low as investors bet on a slower pace of tightening.

Economists at TD Securities said “Poloz took away the hawkish bias without ambiguity,” putting at risk TD’s expectations for a third consecutive hike in October.

“The first public speech by Governor Poloz since the July hike left us thinking he might now be ready for a pause,” they wrote.

The Canadian dollar CAD=D4 weakened to a near four-week low at C$1.2453 to the U.S. dollar, or 80.30 U.S. cents, after the speech and markets trimmed the odds of a hike next month to 36.4 percent. The likelihood of a December move was lowered to 80 percent after being nearly fully priced in before Poloz spoke. BOCWATCH

“All told, the majority of the speech confirms our assumptions that tightening from the Bank of Canada will be a gradual affair from here, with our estimate being that the next move will have a 2018 time stamp,” Nick Exarhos, economist at CIBC, wrote in a note to clients.

Poloz said it was not yet clear how the economy will react to the recent hikes, especially given high household debt, and he declined to directly comment on the recent appreciation of the Canadian dollar.

“There is no magic level (for the currency) and I’m certainly not going to refer to the current level as harmful or beneficial or any of those things. It is a factor which must be taken into account,” Poloz said.

Additional reporting by Andrea Hopkins and Leah Schnurr in Ottawa; Editing by Chizu Nomiyama

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