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OTTAWA, April 20 (Reuters) - The Bank of Canada signaled on Tuesday it will raise interest rates soon, possibly as early as June 1, by abandoning its conditional commitment to keep rates on hold until the end of June and admitting the economic recovery has been faster than expected.
The bank kept its benchmark rate at an all-time low of 0.25 percent, its level for the past year, but began preparing markets for what will likely be the first rate hike by any Group of Seven advanced economy.
“With recent improvements in the economic outlook, the need for such extraordinary policy is now passing, and it is appropriate to begin to lessen the degree of monetary stimulus,” it said in a statement.
It gave the strongest signal yet that it could begin tightening rates in June with the “removal of the conditional commitment,” but left the door open to a July 20 move as well.
“The extent and timing will depend on the outlook for economic activity and inflation, and will be consistent with achieving the 2 percent inflation target,” it said.
Core inflation, which recently caused alarm in markets when it tipped above the bank’s 2 percent target, will ease in the second quarter as the effect of temporary factors dissipates, the bank said, and remain near target after that. Total CPI will hover above 2 percent for much of 2010 and return to target in the second half of 2011.
The economy will return to full capacity in the second quarter of 2011, it said, rather than in the third quarter as it projected in January. While stating that the recovery has been faster than it anticipated, the bank also said the growth profile is “more front-loaded,” meaning that Canadians spent heavily in late 2009 and early 2010 to take advantage of low rates but that the pace of that growth in demand could fade as the bank and government end their stimulus policies.
The bank now sees annual growth this year of 3.7 percent, up from its January estimate of 2.9 percent. But it downgraded slightly its growth forecast for 2011 to 3.1 percent from 3.5 percent and sees activity slowing even further in 2012 to 1.9 percent. (Reporting by Louise Egan; Editing by David Ljunggren)
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