PREVIEW-Bank of Canada seen holding rates steady March 2

WHAT: Bank of Canada interest rate announcement

WHEN: Tuesday, March 2, at 9 a.m. (1400 GMT)

FORECASTS: All 12 primary securities dealers surveyed by
Reuters expect the Bank of Canada to maintain its overnight
target rate (CABOCR=ECI: ) on Tuesday at 0.25 percent.
[ID:nN25112645]

Nine of the 12 forecast the bank will follow through on its
conditional pledge to hold rates at their current level until
the end of June, with one seeing the first hike in April and
two expecting a hike in June.

All think the bank will raise rates at some point this
year, with forecasts for the year-end rate ranging from 0.75
percent to 1.75 percent.

Yields on overnight index swaps, which trade based on
expectations for the key central bank rate, showed investors
expect the bank’s overnight rate to rise to around 0.50 percent
by September whereas a week ago they expected rates to reach
that level by July. (BOCWATCH: )

FACTORS TO WATCH:

Exit Strategy: Markets are eager for guidance from the bank
on how soon it thinks rate tightening is needed. The bank may
take a cue from U.S. Federal Reserve Chairman Ben Bernanke and
dampen incipient market talk of an early rate hike. Canada’s
central bank has said it plans to keep rates on hold until the
end of June but that pledge is conditional on inflation
following a desired path. In the unlikely case that the bank
wants to abandon that plan, it would likely signal that shift
in March or April.

Inflation: Inflation has jumped a bit faster toward the
bank’s 2 percent target than it had predicted, so it will
likely acknowledge that but will choose its message carefully.
It can either repeat the language it used in January and
suggest price pressures are offset by considerable slack in the
economy, meaning it sees no need to hike rates. Alternatively,
it could issue a more upbeat message on growth, signaling a
slightly more hawkish tone.

Core inflation rose to 2 percent in January and overall
inflation was 1.9 percent, leading to some expectation that the
bank would react by either hiking rates earlier than planned or
waiting out its low-rates period but then hiking rates
aggressively after that.

Recovery: The bank predicted economic growth would pick up
in the fourth quarter but recent data points to even stronger
growth than the bank’s 3.3 percent estimate. Given the
uncertainty of the outlook throughout the recession and early
recovery stages, the bank has been willing to overlook
short-term deviations from its projections and has maintained
its longer-term view. Any suggestion otherwise in its statement
would mean a substantive policy shift. It also emphasizes the
strong linkages to the U.S. economy, which has disappointed on
the growth front.

Dollar: The Canadian dollar has retreated from highs
against the U.S. dollar that threatened to hamper the recovery
and led the bank to fret openly about exchange rate dangers as
recently as January. Investors should expect softer language on
the currency.

MARKET IMPACT:

A statement that stays the course and upholds the existing
rate outlook would put to rest any concerns about imminent
monetary tightening. That would likely bump down the Canadian
dollar versus the U.S. dollar and cause bond yields to fall.

Conversely, an unexpectedly hawkish statement would lead
investors to prepare for earlier rate hikes, pushing the
Canadian dollar up.

Stock Market Trading

(Reporting by Louise Egan; Editing by Rob Wilson and Jeffrey
Hodgson)

PREVIEW-Bank of Canada seen holding rates steady March 2