* Rates on hold at 1 percent since September 2010
* Bank flags "downside risks" of weak inflation
* Sees "elevated" risk of household imbalances
* Signals it will focus on core rate inflation in 2014
* Cuts Q1 GDP growth forecast; outlook for year unchanged
(Recasts with comments from Governor Poloz at press conference)
By Louise Egan and Leah Schnurr
OTTAWA, April 16 Canadian central bank chief
Stephen Poloz said on Wednesday an interest rate cut is still a
possibility even though the bank forecasts inflation will pick
up speed this year and approach its 2 percent target.
The Bank of Canada held its benchmark interest rate at 1
percent, as expected, extending a 3-1/2 year freeze on borrowing
Poloz described the bank's monetary policy stance as
neutral, as it has been since last October, meaning there is
just as much chance of a rate cut as of a hike.
Following the release of some stronger economic data
recently, market players had been watching for any sign he would
change his tone on inflation to be less dovish than he was in
the bank's March and January rate statements.
But in its Wednesday statement, the bank repeated that "the
downside risks to inflation remain important", although there
are also risks associated with near record-high household debt.
"We are neutral. And that means that rate cuts cannot be
taken off the table at this stage," Poloz told reporters.
"I would remind you that inflation today is almost exactly
what is was in January, when we last put out an MPR (Monetary
The bank said the timing and direction of its next rate move
will depend on data.
In a Reuters poll published on April 9, economists predicted
the bank would not make a move on rates until the third quarter
of 2015, when they forecast it would opt for 25 basis point
"There is still a remote chance ... maybe 20 or 30 percent
at most, that a rate cut scenario could be in the cards, but I
think that is unlikely," said Derek Holt, economist at
Traders have been pricing in a very small chance of a rate
cut later this year and they slimmed down that bet further after
the bank's Wednesday press conference and quarterly Monetary
VIEW ON 'LOWFLATION'
The biggest change in the bank's forecasts came in the
Monetary Policy Report, with the bank saying it sees a faster
than expected rise in Canada's headline inflation rate, which
has been below its 2 percent target for nearly two years.
The bank now sees the rate hitting 2 percent in the first
quarter of 2015 and staying there through 2016. In January, the
bank forecast it would not reach 2 percent until the fourth
quarter of next year.
However, the bank suggested it would not react to the
increase in that inflation measure because it will mainly
reflect temporary upward pressure from higher gasoline and
natural gas prices and a weaker Canadian dollar.
Core inflation, which strips out volatile items, is seen
taking longer to regain momentum due to excess slack in the
economy and intense retail competition. The bank's projections
for core inflation are largely unchanged from January and show a
return to 2 percent in the first quarter of 2016.
Total inflation will stay at about 2 percent, it said.
That's because as the effect of higher fuel prices fades, the
downward pressure from retail competition is expected to persist
for another 1-1/2 years and excess capacity will be absorbed.
Still, most economists said Poloz seemed a little less
worried about disinflation than he was a few weeks ago.
"Somehow, the bank managed to find a way to sound even more
concerned about 'lowflation' even as they upgraded the forecast
for headline inflation," said Doug Porter, chief economist at
BMO Capital Markets.
"They can't ignore headline inflation if energy and food
prices start to run wild. They can't turn a blind eye to that,
but they would largely focus on the core inflation outlook."
The bank said it expected the drivers of growth and
inflation in Canada to gradually strengthen as the United States
recovers from a weather-related slowdown. But its outlooks for
exports and business investment remain weaker than in its
It cut its forecast for Canadian economic growth in this
year's first quarter to 1.5 percent from 2.5 percent,
annualized, and predicted growth of 2.3 percent and 2.5 percent
in 2014 and 2015, respectively.
It raised its inflation forecast for the first quarter to
1.3 percent from 0.9 percent.
(Editing by Randall Palmer; and Peter Galloway)