WHAT: Bank of Canada interest rate announcement; Monetary Policy Report (MPR)
WHEN: Tuesday, Oct. 19 at 9 a.m. (1300 GMT)
Wednesday, Oct. 20 at 10:30 a.m. (1430 GMT)
FORECASTS: All 41 forecasters surveyed by Reuters in a poll released on Thursday expect the Bank of Canada to maintain its overnight target rate on Tuesday at 1.0 percent. [ID:nTOR007843]
Many expect the bank to stand pat on rates for the rest of this year. Forecasts for the overnight rate at year-end range between 1.0 percent and 1.25 percent. By the end of 2011, market experts put the key rate between 1 percent and 2.75 percent, with a median of 2 percent.
Markets were pricing in a 90 percent probability that the key central bank rate would stay unchanged next week, according to a Reuters calculation based on yields on overnight index swaps. The data showed investors expect the rate to rise to around 1.25 percent by May 2011. BOCWATCH
Growth: The rate statement on Tuesday will likely downgrade the bank’s economic growth forecasts for 2010 and 2011. The bank will provide quarterly estimates and detailed explanations of its outlook in its monetary policy report the following day.
Analysts expect the bank to lower its projections for growth this year from its July estimate of 3.5 percent, and to possibly lower its 2011 projection from 2.9 percent, citing the flagging U.S. economy and bleak scenario for Canadian exporters.
The bank may leave its 2.2 percent growth outlook for 2012 unchanged or even tweak it higher.
Inflation: The bank is expected to acknowledge that underlying inflation has been slightly weaker than anticipated.
Output gap: Given the slower-than-expected growth, the bank may push back the date at which it sees the economy returning to full capacity. In its July report, it predicted a return to full capacity at the end of 2011, but it may push that back to some time in 2012.
Dollar: The central bank may introduce language used in the past to the effect that “the persistent strength of the Canadian dollar” could slow growth, but analysts do not expect it to be a major focus at this time. The bank has not recently expressed any concern about the rising currency, which on Thursday pushed past parity with the U.S. dollar for the first time since April. [ID:nN13265832] Last year and earlier this year, when the dollar was at comparable levels, the bank repeatedly flagged the appreciation as a key risk to the recovery. [ID:nN28514256]
Future rate decisions: Many believe the bank is still uncomfortable with rates as low as 1 percent and has an inherent tightening bias, reminding markets repeatedly that it considers conditions to be “exceptionally stimulative”.
However, given the shaky U.S. economy and the weak growth and inflation outlooks for Canada, the bank is likely to repeat that any further rate hikes would require careful consideration. If it were to include more explicit guidance on how long rates might stay on hold, that would be a sign the bank is more dovish than in September.
Markets are likely to react more to the details of the statement than to the rate decision itself, which is widely expected to uphold the status quo.
If the growth forecasts and global outlook are more dovish than the average market view, the Canadian dollar could be bumped lower versus the U.S. dollar and bond yields could fall as investors see little chance of another rate hike any time soon.
Conversely, if the bank emphasizes the upside potential to Canada’s recovery, it would signal an earlier rate hike and push the Canadian dollar higher. (Reporting by Louise Egan; editing by Peter Galloway)