PREVIEW-Bank of Canada seen raising rates Sept. 8 to 1 pct

WHAT: Bank of Canada interest rate announcement

WHEN: Wednesday, Sept. 8 at 9 a.m. (1300 GMT)

REUTERS FORECASTS: Twenty-five of 41 forecasters polled by
Reuters expected the Bank of Canada to raise its overnight
target rate to 1 percent from 0.75 percent. The poll showed a
55 percent median probability of a rate hike.

That poll included Canada’s 12 primary securities dealers
— the institutions that deal directly with the bank to help it
carry out monetary policy — and 10 of them forecast a rate
hike.

Markets on Friday were pricing in an almost 63 percent
probability of a hike next Wednesday, according to a Reuters
calculation based on yields on overnight index swaps.
(BOCWATCH: ) For more details on this calculation see
(IRPROBABILITY: ).

Most of the poll participants saw no more movement in rates
for the rest of 2010. More than half thought rates would sit at
1 percent at yearend, with a forecast range of 0.75 percent to
1.50 percent.

FACTORS TO WATCH:

U.S. data: The central bank had anticipated U.S. economic
growth to moderate but recent data suggest the U.S. recovery
may be even more protracted than it had estimated. The question
is how much more protracted. The bank’s statement will likely
emphasize U.S. weakness over European sovereign debt problems,
which were flagged as the top risk in the bank’s last rate
statement in July.

Nonfarm payrolls for August, released on Friday, were the
final piece of U.S. data to feed into the bank’s rate decision
and showed employment fell far less than expected.

Canadian data: Investors will watch for the bank’s reaction
to weaker-than-expected second-quarter growth of 2 percent, a
full percentage point below the bank’s projection. Again, in
July it had predicted slowing growth but said it saw exports
and business investment contributing more to growth. So far,
exports show little sign of improvement due to anemic U.S.
demand, while there have been some encouraging signs that
businesses are spending to expand operations.

Employment growth has been positive, along with consumer
spending and there is no fear of inflationary pressures, nor or
deflation.

Technical difficulties: The bank has said that operating at
the lowest possible overnight rate of 0.25 percent has posed
logistical challenges because of required changes to the
operating band and the framework for transmitting monetary
policy to the financial system. As a result, it was eager to
lift the rate from the emergency low of 0.25 percent in June
and may feel more comfortable lifting it to 1 percent before
pausing.

Still accommodative: A benchmark rate of 1 percent was last
seen at the height of Canada’s recession in early 2009 — at
that time a 50-year low — and is still considered highly
stimulative.

Tone of statement: Investors will be watching for a
possible shift towards more neutral language that would
indicate no further hikes are planned, at least until December
or possibly into 2011. In its June 1 and July 20 rate
statements, the bank cautioned that “any further reduction of
monetary stimulus would have to be weighed carefully against
domestic and global economic developments.” If it drops that
line or softens it further, a pause in the rate-tightening
campaign would be likely.

MARKET IMPACT:

Markets are leaning ever so slightly towards pricing in a
rate hike so a move to lift rates would likely trigger a rally
in the Canadian dollar and cause bond yields to rise.

However, that reaction will be tempered if a hike is
accompanied by a more dovish outlook signaling the bank will
keep its rate steady for the next few months at least.

The most negative signal the bank could give would be to
stand pat, which would likely spark a sell-off in the Canadian
currency as investors bet on a worsening economic climate and a
prolonged period of low rates.
(Reporting by Louise Egan; editing by Peter Galloway)

PREVIEW-Bank of Canada seen raising rates Sept. 8 to 1 pct