* Rates on hold; BoC repeats hike likely needed over time
* Analysts say BoC not backing away from rate-hike stance
* Underlying economic momentum softer than expected
* Bank says inflation to hit 2 pct target over next 12
* Says fiscal cliff holding back U.S. expansion
By Louise Egan and Randall Palmer
OTTAWA, Dec 4 Canada's central bank was
unwavering on Tuesday in its view that it may need to hike
interest rates, not cut them, even as the country's economy
shows signs of slowing and uncertainty over the U.S. fiscal
cliff shakes North American economic confidence.
Bank of Canada Governor Mark Carney - who will become head
of the Bank of England in July - has held the overnight lending
rate at 1 percent since September of 2010, the longest period of
bank inactivity on rates since the early 1950s.
But that didn't stop the bank from repeating the wording for
its rate outlook that it used in October to signal it is leaning
towards tightening monetary policy. It is the only central bank
in the Group of Seven wealthy nations to have that bias.
"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 a statement, using
language identical to that it employed in its Oct. 23 rate
The bank began talking about rate hikes starting in April of
this year and in October Carney tweaked that message slightly to
say a move was "less imminent", although the next move on rates
would still be an upward one. Market players don't expect a hike
until the fourth quarter of 2013.
There were no explicit signs in Tuesday's statement that the
bank was preparing to turn dovish, at least for now.
"The key is that they're keeping word for word to the bias
that they introduced in October," said Doug Porter, deputy chief
economist at BMO Capital Markets.
"I think the real test for the bank and markets will be
whether we do get a reversal in the economic data in the weeks
ahead, or it continues to deteriorate, and I think that's going
to determine whether they stick to that bias in early 2013," he
The bank acknowledged Canada's disappointing third-quarter
economic growth of 0.6 percent, annualized, although it said the
slowdown was partly due to temporary disruptions in the energy
"Although underlying momentum appears slightly softer than
previously anticipated, the pace of economic growth is expected
to pick up through 2013," it said.
The Canadian dollar extended gains against the U.S. dollar
after the bank's statement to a session high of C$0.9926 vs the
U.S. dollar, or $1.0075, up from Monday's finish of C$0.9949, or
Yields on overnight index swaps, which trade based on
expectations for the policy rate, showed traders scaled back
their bets on a rate cut after the statement maintained the
bank's hawkish language.
Camilla Sutton, chief currency strategist at Scotiabank,
said the Canadian dollar had been held back this week by the
perceived risk of a policy shift by the central bank.
"Now that it's passed, this type of steady-as-she-goes
statement opens up the potential for Canadian dollar strength,"
HOUSING MARKET COOLING
The bank was cautiously upbeat on developments in the
overheated housing market, saying housing activity is beginning
to cool from record high levels and growth in household credit
has slowed. However, it is too early to say whether the trend
will be sustained, it warned, noting that personal debt
continues to rise.
Inflation, which analysts expect to be below the bank's
forecasts in the fourth quarter, is "broadly in line" with the
bank's October projections, it said. It sees both total and core
inflation returning to the bank's 2 percent target "over the
course of the next 12 months". In October, it said core
inflation would reach the target in mid-2013 and total inflation
would reach it at the end of next year.
October inflation was 1.3 percent, well below the bank's
projection for average inflation of 1.6 percent in the fourth
The bank also noted that the gradual growth in the United
States, Canada's top trade partner, was being held back by
uncertainty over the so-called fiscal cliff, a set of tax hikes
and spending cuts that will automatically kick in next year and
set the economy back unless a gridlocked Congress negotiates an
alternative deal with the White House.
The overall global economy has not delivered any surprises
since the bank's October projections, with Europe remaining in
recession and Chinese growth stabilizing, the bank said.