PREVIEW-Bank of Canada to lay low, unlikely to signal hike

WHAT: Bank of Canada interest rate announcement

WHEN: Tuesday, May 31, at 9 a.m. (1300 GMT)

FORECASTS: All but one of 43 economists and strategists in
a Reuters poll expect the Bank of Canada to keep its benchmark
interest rate unchanged at 1 percent on May 31. The central
bank is seen hiking sometime in the third quarter, implying a
move on July 19 or Sept. 7, or both. [CA/POLL]

This marked a shift from an April poll, when most primary
dealers expected the first 2011 rate hike in July.

Those bets are now off, and some analysts are even
wondering whether it makes sense to lift borrowing costs at all
in 2011 from the current level of 1 percent.

Many analysts say the central bank is unlikely to raise
interest rates this summer as the global commodity boom fails
to deliver the traditional lift to the country's export-based
economy. [ID:nN26119785]

Yields on overnight index swaps, which trade based on
expectations for the central bank rate, also showed traders see
a 98 percent probability rates will stay unchanged on Tuesday.
Over the past two weeks, they have reduced rate hike bets for
the remainder of the year. BOCWATCH

FACTORS TO WATCH:

LANGUAGE - Many expected the language of the Bank of
Canada's May 31 statement to remain cautious rather than move
to prepare market for near-term tightening. This means the bank
could repeat dovish phrases such as "any further reduction in
monetary policy stimulus would need to be carefully
considered."

Prior to its first post-crisis rate hike last June, the
bank said it was "appropriate to begin to lessen the degree of
monetary stimulus." However, Bank of Canada Governor Mark
Carney was reported as saying this month at an off-the-record
event that he saw less need for such explicit guidance ahead of
the next increase. [ID:nN19252818]

INFLATION - Softer-than-expected inflation figures for
April took off some of the pressure for the Bank of Canada to
resume tightening monetary policy. [ID:nN20192631]

The fact that the inflation rate was above the bank's
target rate for a second straight month did not seem to faze
Carney, who suggested in a May 16 speech that price pressures
were temporary. [ID:nN16281097]

GROWTH - A dovish statement by the bank on Tuesday may look
strange coming a day after Statistics Canada is expected to
report blockbuster growth for the first quarter.

But the second quarter is expected to look much worse due
to the Japanese earthquake's disruptions to assembly plants and
wild fires and power outages hitting the oil industry.

CURRENCY - The Canadian dollar's CAD=D4 persistent
strength against the U.S. was once again flagged by Carney in
his May 16 speech as a drag on the recovery. The
commodity-driven currency -- which last month hit its highest
level against the U.S. dollar since November 2007 -- could do
some of the bank's job of monetary tightening.

COMMODITIES - Carney also pointed to elevated commodity
prices as a "brake on growth" in the United States, Canada's
top trading partner. In the past, high prices for oil, gas and
other resources that Canada extracts have usually coincided
with a big U.S. appetite for non-resource exports like autos, a
winning scenario for Canada.

Carney said this time the equation is different. Global
demand is driven by China and other emerging economies which
buy only 10 percent of Canadian exports. The traditional U.S.
market is listless as American consumers face skyrocketing
prices at the pump when they're already hurting from high
unemployment.

HOUSING MARKET - Another reason Carney might not want to
raise rates too quickly is the still-heated housing market.
Household debt levels have soared as Canadians borrow heavily
to buy property, making them more vulnerable to rate hikes than
in the past.

FED RATE - Given market expectations the U.S. Federal
Reserve will not raise rates until next year, Canada's central
bank may prefer to delay its own increases for as long as
possible to avoid widening the rate gap and pushing the
Canadian dollar even higher. [FED/R]

MARKET IMPACT - If the bank statement is more hawkish than
expected it could prompt dealers to raise their bets for future
rate hikes. This would likely push up the Canadian dollar and
weigh on interest-rate sensitive T-bill and bond prices.

If the bank produces a statement similar to the one in
April -- with no signal it plans raise rates soon -- it could
further weigh on the currency and help underpin bond prices.
(Reporting by Louise Egan and Claire Sibonney; Editing by
Jeffrey Hodgson)