* BoC softens hawkish language slightly
* Timing of rate hike now less definite
* Bank says will consider household debt in setting policy
* Inflation, growth outlook slightly more downbeat
By Louise Egan and Randall Palmer
OTTAWA, Oct 23 The Bank of Canada surprised
markets on Tuesday by leaning towards higher interest rates and
issuing a fairly upbeat outlook on growth, adding for the first
time that soaring household debt could justify eventual rate
The central bank, which has held its key rate at 1.0 percent
for two years, continued to use the hawkish language adopted in
April that has made it an outlier among the central banks of
It softened its tone only slightly by making the timetable
for rate hikes less definite.
"All in all, the Bank of Canada continues to be one of the
most hawkish central banks in the advanced economies," said
Camilla Sutton, chief currency strategist at Scotiabank.
Canada recovered more quickly from the global financial
crisis than the United States or Europe and continues to grow
moderately with a relatively small budget deficit to deal with.
Markets had been primed for milder language after a speech
by Bank of Canada Governor Mark Carney last week that was seen
as decidedly more dovish.
But Carney largely held his ground, even as the U.S. Federal
Reserve kicks off a two-day meeting, which is expected to assess
a major new bond-buying plan announced last month and as the
Bank of Japan is widely seen providing more support for its
Previously, the Bank of Canada had made rate hikes
conditional on the economy absorbing excess slack, a way of
saying gross domestic product would have to expand by at least 2
percent, a scenario which is seen as increasingly unlikely as
That reference was dropped on Tuesday.
"Over time, some modest withdrawal of monetary policy
stimulus will likely be required, consistent with achieving the
2 percent inflation target," the bank said in its statement.
The bank appeared intent on telegraphing that rates will go
up, not down, even in the face of global uncertainty.
"We thought they'd water it down a bit. But from some
angles, this actually isn't watered down much at all," said Doug
Porter, deputy chief economist at BMO Capital Markets.
The Canadian dollar firmed against the U.S.
currency after the rate statement but later retreated to the
same level as Monday's close at C$0.9926 versus the U.S. dollar,
Short-term debt prices fell on the news. The two-year
government bond lost 8 Canadian cents to yield 1.136
percent, even as the benchmark 10-year bond rose 18
Canadian cents to yield 1.853 percent.
Overnight index swaps, which trade based on expectations for
the central bank's key policy rate, showed that after the
announcement traders made fresh bets on the possibility of a
rate hike in 2013.
Analysts in a Reuters poll last week forecast the bank would
wait until the fourth quarter of next year before raising rates.
DEBT BURDEN IN DANGER ZONE
Flagging its alarm over Canadian consumers piling on more
debt than they can afford, the bank said for the first time that
the state of personal finances would help decide the timing of
rate hikes, as part of the bank's assessment of conditions.
"Households need to slow their borrowing on their own, or
else the Bank of Canada will give them a reason to do so," Avery
Shenfeld, chief economist at CIBC World Markets, said in a note
The debt-to-income ratio of Canadian households has climbed
to levels seen in the United States before its housing crash.
For every dollar earned, households owe C$1.64 - the highest
ratio on record.
Mortgages explain much of that debt as Canadians take
advantage of ultra-low borrowing costs at a time of rising home
prices. But the hot housing market that had persisted since the
2008-09 recession has begun to slow after the government
tightened mortgage rules for the fourth time since 2008.
"That might be just enough to keep Carney's new weapon -
rate hikes aimed at debt levels - sitting on the shelf for next
year. But those who expect that the Bank would make that pledge
today, or even more dramatic, think about scenarios for rate
cuts, got a bit of a rude awakening," said Shenfeld.
The Bank of Canada said it expects housing activity to
decline, but sees the household debt burden rising further
before stabilizing by the end of 2014.
Its growth and inflation outlook for Canada were tweaked
slightly and a little more downbeat than in July. It now sees
the economy returning to full capacity and inflation returning
to its 2 percent target by the end of 2013.
The bank sees economic growth this year of 2.2 percent and
growth of 2.3 percent and 2.4 percent in 2013 and 2014,