* Central bank holds rate at 1.0 percent as expected
* Says rate hikes still likely but after "a period of time"
* Inflation weaker than expected; continued slack in economy
By Louise Egan and Randall Palmer
OTTAWA, March 6 The Bank of Canada softened its
stance on the need for interest rate hikes on Wednesday, saying
it will likely hold its benchmark rate steady for "a period of
time," but that its next move would still probably be a hike
rather than a cut.
The central bank held its overnight lending target unchanged
at 1.0 percent, where it has been since September 2010. It had
been signaling for several months that it intends to raise the
rate, but in January said such a move was "less imminent" and on
Wednesday it took another step back.
"With continued slack in the Canadian economy, the muted
outlook for inflation, and the more constructive evolution of
imbalances in the household sector, the considerable monetary
policy stimulus currently in place will likely remain
appropriate for a period of time, after which some modest
withdrawal will likely be required, consistent with achieving
the 2 percent inflation target," the bank said.
Its previous guidance did not include a reference to
"continued slack" or to the "period of time" over which rates
would likely stay on hold.
The Bank of Canada is alone among central banks of the Group
of Seven leading industrialized nations to have a tightening
But it is watering down that bias following the weakest six
months of growth since the 2008-09 recession, which meant the
Canadian economy underperformed the U.S. economy for the first
time in seven years.
Central bank chief Mark Carney expects the economy to regain
momentum through 2013, but Wednesday's figures offered evidence
instead of continued weakness. The pace of purchasing activity
in Canada slowed in February for the second straight month,
according to Ivey Purchasing Managers Index data.
The seasonally adjusted index fell to 51.1 from 58.9 in
January. Analysts polled by Reuters had expected a reading of
Global forecasters in a Reuters poll published on Feb. 27
pushed back expectations for the bank's next rate hike to the
first quarter of 2014 from the fourth quarter of 2013
Ahead of Wednesday's announcement, some market players had
even braced for a complete removal of any mention of rate hikes
in the future.
But most received what they had expected - a more nuanced
nod to a disappointing economic performance that pushed any
monetary tightening far off into the horizon, but still put
indebted consumers on notice that borrowing costs can only go
"They went more dovish on the details, signaling more spare
capacity and generally more subdued inflationary pressures,"
said Derek Holt, economist at Scotiabank.
"To me, that just says the Bank of Canada is playing the
pause, which is in line with our forecast that the bank is on
hold through all of this year and next and they are going to
fight the rate cut camp pretty forcefully going forward."
The Canadian dollar weakened to a session low
against the U.S. dollar immediately after the rate statement.
At 12 noon (1700 GMT), the currency was at C$1.0313 to the
greenback, or 96.96 U.S cents, compared with C$1.0288 just
before the central bank announcement and $1.0280 at Tuesday's
North American close.
Traders slightly increased bets of a rate cut later this
year, according to yields on overnight index swaps which trade
based on expectations for the policy rate.
Inflation has been weaker than the bank anticipated but it
still sees both core and total inflation returning to its 2
percent target by the end of 2014. Low core inflation was
"consistent with material excess capacity."
The central bank's language on the housing market and
household debt were also similar, with a projection that
residential investment will decline further from historical
highs and the household debt-to-income ratio will stabilize near
The bank played down the economy's humdrum growth in the
fourth quarter of 0.6 percent annualized, noting "solid growth
across most domestic components of gross domestic product,"
which was offset by a sharp drawdown in inventories.
Its broad outlook for the Canadian economy was unchanged
from January. It believes growth will gain momentum through 2013
with the help of modest household spending and a recovery of
business investment and exports.