PREVIEW-Bank of Canada seen raising rates Sept. 8 to 1 pct

WHAT: Bank of Canada interest rate announcement

WHEN: Wednesday, Sept. 8 at 9 a.m. (1300 GMT)

REUTERS FORECASTS: Twenty-five of 41 forecasters polled by Reuters expected the Bank of Canada to raise its overnight target rate to 1 percent from 0.75 percent. The poll showed a 55 percent median probability of a rate hike.

That poll included Canada's 12 primary securities dealers -- the institutions that deal directly with the bank to help it carry out monetary policy -- and 10 of them forecast a rate hike.

Markets on Friday were pricing in an almost 63 percent probability of a hike next Wednesday, according to a Reuters calculation based on yields on overnight index swaps. BOCWATCH For more details on this calculation see IRPROBABILITY.

Most of the poll participants saw no more movement in rates for the rest of 2010. More than half thought rates would sit at 1 percent at yearend, with a forecast range of 0.75 percent to 1.50 percent.

FACTORS TO WATCH:

U.S. data: The central bank had anticipated U.S. economic growth to moderate but recent data suggest the U.S. recovery may be even more protracted than it had estimated. The question is how much more protracted. The bank's statement will likely emphasize U.S. weakness over European sovereign debt problems, which were flagged as the top risk in the bank's last rate statement in July.

Nonfarm payrolls for August, released on Friday, were the final piece of U.S. data to feed into the bank's rate decision and showed employment fell far less than expected.

Canadian data: Investors will watch for the bank's reaction to weaker-than-expected second-quarter growth of 2 percent, a full percentage point below the bank's projection. Again, in July it had predicted slowing growth but said it saw exports and business investment contributing more to growth. So far, exports show little sign of improvement due to anemic U.S. demand, while there have been some encouraging signs that businesses are spending to expand operations.

Employment growth has been positive, along with consumer spending and there is no fear of inflationary pressures, nor or deflation.

Technical difficulties: The bank has said that operating at the lowest possible overnight rate of 0.25 percent has posed logistical challenges because of required changes to the operating band and the framework for transmitting monetary policy to the financial system. As a result, it was eager to lift the rate from the emergency low of 0.25 percent in June and may feel more comfortable lifting it to 1 percent before pausing.

Still accommodative: A benchmark rate of 1 percent was last seen at the height of Canada's recession in early 2009 -- at that time a 50-year low -- and is still considered highly stimulative.

Tone of statement: Investors will be watching for a possible shift towards more neutral language that would indicate no further hikes are planned, at least until December or possibly into 2011. In its June 1 and July 20 rate statements, the bank cautioned that "any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments." If it drops that line or softens it further, a pause in the rate-tightening campaign would be likely.

MARKET IMPACT:

Markets are leaning ever so slightly towards pricing in a rate hike so a move to lift rates would likely trigger a rally in the Canadian dollar and cause bond yields to rise.

However, that reaction will be tempered if a hike is accompanied by a more dovish outlook signaling the bank will keep its rate steady for the next few months at least.

The most negative signal the bank could give would be to stand pat, which would likely spark a sell-off in the Canadian currency as investors bet on a worsening economic climate and a prolonged period of low rates. (Reporting by Louise Egan; editing by Peter Galloway)