September 2, 2011 / 2:36 PM / 8 years ago

PREVIEW-Bank of Canada seen holding rates on Sept. 7

WHAT: Bank of Canada interest rate announcement

WHEN: Wednesday, Sept. 7, at 9 a.m. (1300 GMT)

FORECASTS: A Reuters survey of Canada’s 12 primary securities dealers [ID:nN1E77I1EV] and a separate Reuters poll of 43 forecasters [CA/POLL] unanimously predict the Bank of Canada will keep its overnight target rate at 1 percent on Wednesday.

The major issue is what sort of language the bank will use to describe the future path of interest rates and the state of the economy. Its rate statement is almost certain to be more dovish than its last one on July 19.

FACTORS TO WATCH:

Phrasing on withdrawal of monetary stimulus:

On July 19, the bank dropped the term “eventually” in saying it would withdraw monetary stimulus if economic expansion continued. Here is its precise language: “To the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be withdrawn, consistent with achieving the 2 percent inflation target.”[ID:nN1E76I045]

On Aug. 19, Governor Mark Carney modified that stance, saying the bank would be prudent: “We have emphasized that we would be prudent with respect to the possible withdrawal of any degree of monetary stimulus.”[ID:nN1E77I0K4]

Any indication of an interest rate cut:

This is unlikely, with most economists forecasting the next move will be up. The median forecast of economists surveyed is that the bank will raise the rate in the second quarter of 2012. However, yields on overnight index swaps, which trade based on expectations for the key rate, showed investors still expect it to fall late this year or sometime in 2012. Also, at least one analyst does not rule out a commitment by the bank to hold rates steady for a specific period of time. BOCWATCH

Growth prospects:

After the 0.4 percent annualized fall in real GDP in the second quarter [ID:nN1E77U0QM], the bank may update its general outlook for the rest of the year, although it will not provide actual forecasts. The bank’s July 20 Monetary Policy Report, now seen as somewhat dated, forecast growth of 2.8 percent in the third quarter, 2.9 percent in the fourth quarter, and 2.6 percent in 2012.

Inflation:

The bank’s July expectation was for inflation to return to its 2 percent target by mid-2012, and for core inflation to hit 2 percent by the fourth quarter of this year. In July, overall inflation fell to 2.7 percent from 3.1 percent, and core rose to 1.6 percent from 1.3 percent. [ID:nN1E77I02W] Any acceleration of the rise in core inflation could raise expectations of a rate hike.

Language on the Canadian dollar:

On Aug. 19, Carney said external headwinds were now blowing harder, adding that “the persistent strength of the Canadian dollar is compounding the sluggishness of U.S. demand.” The Canadian dollar has traded above the one-for-one level with the U.S. dollar for most of 2011.

MARKET IMPACT:

If the bank sounds even more cautious than Carney did on Aug. 19, this would be expected to weaken the Canadian dollar and boost bond prices, at least at the short end of the curve.

Any suggestion that the bank will plow ahead with rate hikes in the not-too-distant future would likely strengthen the Canadian dollar and weaken bonds. (Reporting by Randall Palmer; editing by Peter Galloway and Jeffrey Hodgson)

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