PREVIEW-Bank of Canada on hold, but next move in sight

WHAT: Bank of Canada interest rate announcement and
Monetary Policy Report (MPR)

WHEN: Tuesday, April 12 at 9 a.m. (1300 GMT)

Wednesday, April 13 at 10:30 a.m. (1430 GMT)

FORECASTS: All 41 economists and strategists in a Reuters
poll released on Thursday expected the Bank of Canada to keep
its benchmark interest rate unchanged at 1 percent on April 12
and most predict no move on May 31 either. July 19 is now
widely seen as the most likely date for the bank to resume
tightening monetary policy. [CA/POLL]

This marked a shift from a previous poll on Feb. 24 when
the median forecast was for the first hike to be in May.

Yields on overnight index swaps, which trade based on
expectations for the central bank rate, showed investors see
almost no chance of a rate move this month and have fully
priced in a quarter-point increase by September. (BOCWATCH: Quote, Profile, Research)


INFLATION – Will the bank repeat the line that inflation
“has been consistent” with expectations or introduce a more
hawkish tone? It targets annual inflation at the midpoint of a
1-3 percent range. While inflation has been tame — with a core
rate of 0.9 percent in February — the bank’s own first-quarter
survey of businesses showed a rise in inflation expectations.

Bank of Canada Governor Mark Carney moved markets last
month when he said the world was in the midst of a commodity
supercycle and that he expected the boom to last decades,
suggesting the clock is ticking on emergency low rates.

However, the BoC survey also revealed that businesses don’t
expect to pass on higher raw materials prices to consumers.
Some analysts argue the low February core inflation was due to
temporary factors and that more data is needed before jumping
to conclusions.

GROWTH UPGRADE – Stronger-than-expected economic growth
means the bank may predict a return to full capacity sooner
than the end-2012 date it gave in January, hence speeding up
the rate-tightening cycle. It could omit or revise the
reference to “considerable slack” in the economy, with the MPR
providing full details of when the bank sees the “output gap”

The bank will most certainly raise its annual and quarterly
economic growth projections for 2011. In January, it projected
2.5 percent first-quarter growth, while economists now see the
rate at closer to 4 percent, and the OECD pegged it at 5.2

DOLLAR – The Canadian dollar’s persistent strength,
including a flight to a three-year high this week, has had a
monetary tightening effect and will likely allowed the bank to
postpone rate hikes. The bank repeatedly cites the strong
currency and poor productivity as twin challenges to the
recovery. But given Carney’s views on the long-lasting nature
of the commodity price boom, it’s not clear whether the
currency will stand in the way of a rate move.

GLOBAL CRISES – The MPR is likely to highlight the European
sovereign debt crisis and the Japan nuclear disaster as big
risks to the global outlook, but with limited impact on Canada
unless something unexpected happens.


If the bank statement is seen as hawkish, it could prompt
dealers to change their forecasts of a rate hike to May from
July. This would likely push up the Canadian dollar.

If the bank produces a statement similar to the one in
March, the currency could slide on investors bet that rate
increases are further in the future.
(Reporting by Louise Egan; editing by Peter Galloway and
Jeffrey Hodgson)

PREVIEW-Bank of Canada on hold, but next move in sight