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PREVIEW-Bank of Canada unlikely to make dramatic moves
October 18, 2009 / 2:05 PM / 8 years ago

PREVIEW-Bank of Canada unlikely to make dramatic moves

* BoC likely to keep low-rate pledge, upgrade forecasts

* Heightened rhetoric on currency expected

* Inflation outlook largely unchanged

By Louise Egan

OTTAWA, Oct 18 (Reuters) - The Bank of Canada is likely to play it safe when it outlines its policy stance this week, holding the line on interest rates and tinkering at the margins of its economic forecasts as it waits for firmer evidence that the recovery is for real.

There is plenty of drama in the Canadian economy. The high-flying currency threatens to stifle recovery, but at the same time the housing and job markets appear to be reheating faster than anybody had anticipated.

These areas will warrant the bank’s special attention and it may ratchet up the rhetoric on the Canadian dollar and raise its growth forecasts slightly. But when it comes to policy action, markets shouldn’t expect any theatrics.

The Bank of Canada makes its scheduled interest rate announcement on Tuesday, followed two days later by its Monetary Policy Report. The report, published once a quarter, includes the central bank’s growth and inflation forecasts.

Analysts expect the bank to repeat its commitment to keep the key overnight rate at 0.25 percent until the end of June next year, conditional on inflation staying on track to meet its 2 percent target.

“The inflation outlook, narrowly defined, really hasn’t changed, so for that reason we would expect that that statement should be largely unchanged as well,” said Mark Chandler, fixed-income strategist at RBC Capital Markets.

“It makes more sense for the Bank of Canada to wait, be more certain that this recovery is well entrenched ... and do your heavy lifting, or move quicker to a normal rate in the second half of next year, but don’t preempt or move too quickly in the early stages,” he said.

Eight of Canada’s 12 primary dealers polled by Reuters forecast the bank will not lift rates until late 2010. [CA/POLL]

Even if there are doubts within the six-member governing council about the wisdom of keeping rates unchanged for another eight months, it’s too early to signal a change of heart.

Deutsche Bank Canada chief economist John Clinkard is among those who believe the bank will take a cue from its Australian counterpart and raise rates earlier than expected, probably in the second quarter of 2010. But he says Governor Mark Carney will hold his tongue for now out of fear of pushing the Canadian dollar even higher.

“Their hands are tied in some sense. They have to be extremely balanced in their view,” Clinkard said. “Having said that, I don’t think they can ignore some of the numbers that have been coming through.”

Strong Canadian economic data recently has included two months of hefty employment gains and a housing report showing record third-quarter sales. But consumer prices continued to fall in September at an annual rate and exports have fared miserably.

Currency commentary will likely provide the most excitement for central bank watchers as the bank may escalate its expression of concern about the Canadian dollar’s rapid move toward parity with the U.S. dollar. The currency touched a 14-month high on Oct. 15.

INTERVENTION UNLIKELY

But dealers in the Reuters survey said chances are slim that Carney will meddle in the foreign exchange market or print more money to buy debt, a step known as quantitative easing, to slow the Canadian dollar’s rise.

The currency has leapt 26 percent since hitting a four-year low in March and raced up 5.5 percent in just the last three weeks.

Carney and his deputies have already delivered a series of warnings against currency speculation and discussed the issue recently with concerned exporters, who say that for every 1 percent increase in the value of the Canadian dollar their sales drop by C$2 billion ($1.94 billion).

“Obviously the sharper moves we’ve seen recently will start to weigh on them. (It‘s) still not the case that direct intervention is likely. Still not the case that they will resort to quantitative easing or credit easing measures,” Chandler said.

A strong currency also makes imported goods cheaper, and so could help keep inflation at bay.

The bank hinted last month that growth in the second half of this year would be stronger than it had projected in July, when it forecast growth of 1.3 percent and 3 percent in the third and fourth quarters, respectively. Its report on Thursday will attach numbers to the revised outlook.

Analysts will be watching closely to see whether the bank also alters its view on 2010 from its existing expectation of 4 percent average growth in the first half, softening slightly to 3.8 percent in the final two quarters. (Editing by Peter Galloway)

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