October 19, 2010 / 1:05 PM / in 7 years

Canada holds rate unchanged, unlikely to move soon

OTTAWA (Reuters) - The Bank of Canada kept its benchmark interest rate unchanged at 1 percent, as expected, on Tuesday and cut growth forecasts, but surprised markets with a dovish statement suggesting rates will stay on hold.

<p>The Bank of Canada building is pictured in Ottawa June 1, 2010. REUTERS/Chris Wattie</p>

The Canadian dollar fell to its lowest level in a month, on the growing feeling that the central bank, which raised rates three times in a row between June and September, would now keep them steady for some time.

“At this time of transition in the global recovery, with a weaker U.S. outlook, constraints beginning to moderate growth in emerging market economies, and domestic considerations that are expected to slow consumption and housing activity in Canada, any further reduction in monetary policy stimulus would need to be carefully considered,” it said in a statement.

A Reuters poll of Canada’s 12 primary securities dealers showed none expected a rate hike in December, but five predicted a raise in the first quarter of next year.

Based on a Reuters calculation, the market is pricing in an 95.19 percent chance rates will remain on hold at the December 7 rate decision.

The bank cut its 2010 growth forecast to 3.0 percent from the 3.5 percent it forecast in July, and cut its 2011 forecast to 2.3 percent from 2.9 percent. It raised its prediction for 2012 growth to 2.6 percent from 2.2 percent.

The Canadian dollar dropped to around C$1.0360 to the U.S. dollar, or 96.52 cents, from Monday’s close of C$1.0141 to the U.S. dollar, or 98.61 U.S. cents. It later recovered slightly.

“This is not just a data-watching central bank that is keeping its powder dry in order to evaluate developments over coming months -- this is a central bank that has totally revised its outlook and market guidance,” said Derek Holt and Gorica Djeric of Scotia Capital.

“To us, the Bank of Canada is saying they are on hold until late next year.”

The central bank had taken a cautious line last month as well, hinting that it was unlikely to keep raising rates while the U.S. Federal Reserve seemed set to ease policy further.

“While Canada’s circumstances ... dictate a different policy stance than in the United States, there are limits to this divergence,” Bank of Canada Governor Mark Carney said on Sept 30.

Carney has frequently expressed concern about rising Canadian debt rates, fueled in part by the low cost of borrowing.

The bank said weak labor markets and “ongoing deleveraging” as advanced economies scale back stimulus packages and rein in debt and budget deficits would bring a weaker-than-projected recovery in the United States, Canada’s main export market.

“Heightened tensions in currency markets and related risks associated with global imbalances could result in a more protracted and difficult global recovery,” it added.

Forecasting somewhat more subdued inflation, the bank said it would take until the end of 2012 for core and total inflation to converge at its 2 percent target. It previously forecast both rates near 2 percent until the end of 2012.

“The inflation outlook has been revised down,” it said.

Core inflation, which strips out volatile items and the effects of tax changes, was 1.6 percent in August, while overall inflation was 1.7 percent. September inflation figures are due for release on Friday.

Additional reporting by John McCrank; editing by Janet Guttsman

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