PREVIEW-Bank of Canada seen holding rates on Dec 7

WHAT: Bank of Canada interest rate announcement

WHEN: Tuesday, Dec. 7 at 9 a.m. (1400 GMT)

FORECASTS: All 44 forecasters polled by Reuters expect the
Bank of Canada to keep interest rates on hold at 1 percent on
Dec. 7, but they were divided on the timing of the next hike in
2011. [CA/POLL]

Among the 42 that predicted the date of the next increase,
the majority expected a move in the first half of next year,
with May 31 seen as the likely date of a quarter-point hike,
according to the median forecast.

But Canada’s 12 primary dealers — the banks that deal
directly with the central bank to help it transmit monetary
policy — were more dovish. The majority predicted the first
rate hike in the second half with a median forecast of a hike
at the July 19 decision date.

Yields on overnight index swaps, which trade based on
expectations for the key central bank rate, were pricing in a
97.69 percent probability of rates being on hold. The yields
imply a strong probability of a 25 basis-points increase in
April, according to a Reuters calculation. (BOCWATCH: )

FACTORS TO WATCH:

The bank lifted its benchmark lending rate (CABOCR=ECI: )
three times this year, but paused after its September hike,
signaling it would be more comfortable waiting until the global
recovery gained more traction. [ID:nN19118876]

So far, there has been little convincing evidence of that.
The bank will not update its forecasts, but analysts will parse
its statement for any change from an October assessment when it
predicted a protracted global recovery as debt and employment
woes offset an expected increase in private demand in advanced
countries. The bank saw a shift toward business investment and
net exports from government and household spending in Canada.

Third-quarter growth fell well below the bank’s projection
of 1.6 percent, annualized, at 1.0 percent and the current
account deficit ballooned to a record high as the strong
currency curbed exports and the housing market cooled. The euro
zone debt crisis also muddies the outlook.

But domestic business investment is picking up momentum.

The bank’s view on inflation will also be key after the
annual rate unexpectedly jumped to a two-year high of 2.4
percent in October. But that alone is unlikely to prompt rate
hikes as consumer prices have trended below expectations for
much of the year and underlying inflation was only 1.8 percent,
close to the 2 percent target. [ID:nN23119481]

MARKET IMPACT:

Market impact is likely to be muted if the bank keeps rates
on hold.

However, an emphasis on any upbeat data or a signs of
concern about price pressures could signal a rate hike earlier
next year rather than later, and lift the Canadian dollar.

Conversely, if the bank signals it is more worried than
before about the state of the global economy, investors could
punish the currency and bond yields could fall.
(Reporting by Louise Egan; polling by Bangalore Polling Unit;
editing by Janet Guttsman and Jeffrey Hodgson)

PREVIEW-Bank of Canada seen holding rates on Dec 7