December 6, 2009 / 2:57 PM / in 8 years

Bank of Canada to keep rates low, uphold outlook

OTTAWA (Reuters) - The Bank of Canada is widely expected to keep its hands off interest rates on Tuesday, holding them at near zero and committing to do so until at least July, despite growing evidence the economy is kicking back to life.

Fears of prolonged economic stagnation eased on Friday with a report showing employers hired five times as many workers as expected. The data supported the Bank of Canada’s view that economic growth will speed up in the fourth quarter after a disappointing third-quarter, when it barely crept out of recession with tepid 0.4 percent annualized growth.

All 12 of Canada’s primary securities dealers, surveyed by Reuters after the jobs report on Friday, forecast the central bank would hold its overnight target rate unchanged at 0.25 percent at its final policy-setting meeting of the year.

The bank releases its rate decision and accompanying statement at 9 a.m. on Tuesday.

Two-thirds of the traders think the bank will follow through on its pledge to hold rates at that level through mid-2010, conditional on inflation staying on track.

“They will lean over backward to make their conditional forecast come true,” said David Laidler, an economist with the C.D. Howe Institute.

“What they might start doing between now and June or July, is they might start making more and more public noises about the need to raise interest rates immediately afterward. That’s the kind of thing you’ll see but not in this announcement,” he said.

Others think the bank’s job will be to dampen any speculation that it will abandon its zero-rate policy at the earliest opportunity.

“We expect the bank to attempt to temper early rate hike expectations at next Tuesday’s policy announcement,” said Sheryl King, head of Canadian economics and strategy at Bank of America Merrill Lynch.


The Bank of Canada will be pleased with the November job gains, not just because its prophecy of a robust 3.3 percent fourth quarter may be fulfilled but because it lessens the bank’s concerns about the strong Canadian dollar hindering a robust recovery.

Governor Mark Carney said in October the rise of the currency against the U.S. dollar had “more than offset the positive developments since July”.

He warned he would take action to stop the appreciation if the currency’s drag on the economy threatened to keep inflation from returning the bank’s 2 percent target.

The currency, which had hit a 2009 high on October 15, weakened after Carney’s remarks. It began strengthening again in early November and now stands at roughly the same level as six weeks ago.

Economists think Carney may tone down the language on currency this time around.

“Even if the currency stays at these levels or gets moderately stronger, as time passes and other things catch up to the strength of the dollar, like commodity prices, that helps them get even further away from extreme options like quantitative easing, direct intervention and a pushing forward of the rate promise,” said Mark Chandler, chief fixed-income and currency strategist at RBC Capital Markets.

The bank could also argue that despite the unexpectedly slack third quarter, its projections over the two-year horizon remain the same as in October.

“Whatever we missed with the third quarter, we’ll make up for it a little bit later, so it’s no big concern of theirs,” said Chandler.

Reporting by Louise Egan; editing by Rob Wilson and Jeffrey Hodgson

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