* Bond prices rise firmly across curve
* Bank of Canada hold rates at 1 percent
* BoC expects inflation to hit target sooner than thought
* BoC cites persistent C$ strength as potential headwind
TORONTO, April 12 (Reuters) - The Canadian dollar softened
on Tuesday morning after the Bank of Canada held interest rates
at 1 percent, as expected, and again cited the "persistent
strength" of the Canadian dollar.
The central bank warned that the high-flying Canadian
dollar was putting downward pressure on inflation, saying this
could create "even greater headwinds for the Canadian
"In two separate instances, they point to the challenges
that were imposed upon the economy by the strong Canadian
dollar. It's a theme they want to get across," said Doug
Porter, deputy chief economist at BMO Capital Markets.
The central bank reiterated comments made in its March 1
policy announcement, hinting that a May 31 interest rate hike
was unlikely. But it set the stage for rate increases later
this year by predicting inflation would hit the bank's target
six months earlier than previously thought. [ID:nN12159489]
The Bank of Canada also raised its economic growth forecast
for 2011 to 2.9 percent from 2.4 percent, but it trimmed its
estimates for 2012. Overall growth expectations were mostly
unchanged from its January forecasts.
"All in all the statement was pretty much what most of us
expected: a slight warning for the strength of the Canadian
dollar and how that impacts the economy," said Camilla Sutton,
chief currency strategist, Scotia Capital.
At 10:20 a.m. (1420 GMT), the currency
C$0.9630 to the U.S. dollar, or $1.0384, down from Monday's
North American finish of C$0.9565 to the U.S. dollar, or
$1.0455, which was close to a 3-1/2 year high.
Market focus now is on the bank's monetary policy report
and news conference on Wednesday morning, with traders set to
parse any further comments on the strength of the Canadian
Money market rates and bond yields fell slightly after the
rate announcement as investors reduced slightly the likelihood
of rate hikes at the Bank of Canada's next policy announcement
date in May.
Overnight index swaps, which trade based on expectations
for the key central bank rate, now show just a 7.72 percent
chance of a rate hike on May 31, compared with 26.61 percent
before the statement. A September rate hike remains the first
fully priced in by the market with a 25 basis point rise seen.
In a Reuters poll of economists and strategists released
last week, however, the median forecast was for the bank to
make the first interest rate hike of the year on July 19.
The two-year bond
, which is especially sensitive
to Bank of Canada policy moves, was up 14 Canadian cents to
yield 1.868 percent, while the 10-year bond added
48 Canadian cents to yield 3.426 percent.
(Additional reporting by Claire Sibonney and Ka Yan Ng;
editing by Peter Galloway)