July 16, 2009 / 8:53 PM / 8 years ago

Bank of Canada focus on forecast, not interest rates

TORONTO (Reuters) - A forecast of a slightly less dismal economy could steal the Bank of Canada headlines next week, as the central bank holds true to its pledge of keeping interest rates at a historic low.

With zero chance of any change to interest rates, the focus will be on possible changes to economic projections, amid talk that the bank could nudge its forecast of a 3.5 percent annualized decline in second-quarter output to something closer to the 2.7 percent decline in the median forecast in a Reuters survey.

The Canadian economy shrank at an annualized 5.7 percent in the first quarter.

“At the end of the day not that much has really changed. A lot of the details have, but the bigger picture is more or less the same. It still looks like the economy is likely on track to begin recovery later this year,” said Doug Porter, deputy chief economist at BMO Capital Markets.

“They will probably upgrade Canada a little. Some of it is just simply looking in the rearview mirror. The first quarter didn’t turn out to be as weak as they thought it might be.”

The Bank of Canada announces interest rates on Tuesday, and follows that with Thursday’s release of its Monetary Policy Report (MPR), the first of a newly-expanded series.

The central bank said this month it will start providing markets with a more detailed explanation of its economic projections four times a year, instead of twice, beginning with its July 23 report.

Charmaine Buskas, senior economics strategist at TD Securities, said next week’s rate announcement would be relatively low key, compared to the previous two announcements that focused on the burning questions of unconventional easing measures or the seemingly unstoppable rise in the Canadian dollar respectively.

“It has less question marks attached to it simply because the way the data has unfolded. The market will be looking for how they characterize what has happened in the economy, including the improvement in the credit markets and what came out of the Bank of Canada surveys,” she said.

“But I think for the most part we can expect the tone and the verbiage to remain mostly the same.”

The Bank of Canada made a conditional pledge in April to hold the policy rate at 0.25 percent until the end of the second quarter of 2010, provided inflation remains under control. Economists expect it to reaffirm that promise.

The Bank of Canada this week released two surveys that reinforce other data suggesting the recession may have hit bottom, and that companies may face fewer hurdles in getting financing in coming quarters.

“The recovery is still very tentative. There’s certainly the stabilization story out there but we’re still wrestling with some very negative optics on some of the harder data points,” said Stewart Hall, economist at HSBC Canada.

While quantitative easing and Canadian dollar are not the pressing issues they were in past meetings, economists said they’re not completely off the agenda.

The Canadian dollar has climbed recently after a 6 percent slump in June. Before then the currency gained nearly 20 percent in the span of two months until the Bank of Canada warned markets about the economic threat posed by the sharp appreciation of the Canadian dollar.

Because of the Canadian dollar’s jump in recent sessions, the currency may be shifting back into the central bank’s focus, said Paul Ferley, assistant chief economist at Royal Bank of Canada.

On the subject of quantitative easing, Ferley noted other central banks have pulled back on unconventional measures or are considering exit strategies.

“(The Bank of Canada) are getting enough signs of economic improvement that (quantitative easing) is less of a pressing issue,” he said.

($1=$1.12 Canadian)

Reporting by Ka Yan Ng; editing by Janet Guttsman and Jeffrey Hodgson

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