RPT-PREVIEW-Bank of Canada seen holding rates steady on Oct 19

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

WHEN: Tuesday, Oct. 19 at 9 a.m. (1300 GMT)

Wednesday, Oct. 20 at 10:30 a.m. (1430 GMT)

FORECASTS: All 41 forecasters surveyed by Reuters in a poll
released on Thursday expect the Bank of Canada to maintain its
overnight target rate on Tuesday at 1.0 percent.
[ID:nTOR007843]

Many expect the bank to stand pat on rates for the rest of
this year. Forecasts for the overnight rate at year-end range
between 1.0 percent and 1.25 percent. By the end of 2011,
market experts put the key rate between 1 percent and 2.75
percent, with a median of 2 percent.

Markets were pricing in a 90 percent probability that the
key central bank rate would stay unchanged next week, according
to a Reuters calculation based on yields on overnight index
swaps. The data showed investors expect the rate to rise to
around 1.25 percent by May 2011. (BOCWATCH: )

FACTORS TO WATCH:

Growth: The rate statement on Tuesday will likely downgrade
the bank’s economic growth forecasts for 2010 and 2011. The
bank will provide quarterly estimates and detailed explanations
of its outlook in its monetary policy report the following
day.

Analysts expect the bank to lower its projections for
growth this year from its July estimate of 3.5 percent, and to
possibly lower its 2011 projection from 2.9 percent, citing the
flagging U.S. economy and bleak scenario for Canadian
exporters.

The bank may leave its 2.2 percent growth outlook for 2012
unchanged or even tweak it higher.

Inflation: The bank is expected to acknowledge that
underlying inflation has been slightly weaker than anticipated.

Output gap: Given the slower-than-expected growth, the bank
may push back the date at which it sees the economy returning
to full capacity. In its July report, it predicted a return to
full capacity at the end of 2011, but it may push that back to
some time in 2012.

Dollar: The central bank may introduce language used in the
past to the effect that “the persistent strength of the
Canadian dollar” could slow growth, but analysts do not expect
it to be a major focus at this time. The bank has not recently
expressed any concern about the rising currency, which on
Thursday pushed past parity with the U.S. dollar for the first
time since April. [ID:nN13265832] Last year and earlier this
year, when the dollar was at comparable levels, the bank
repeatedly flagged the appreciation as a key risk to the
recovery. [ID:nN28514256]

Future rate decisions: Many believe the bank is still
uncomfortable with rates as low as 1 percent and has an
inherent tightening bias, reminding markets repeatedly that it
considers conditions to be “exceptionally stimulative”.

However, given the shaky U.S. economy and the weak growth
and inflation outlooks for Canada, the bank is likely to repeat
that any further rate hikes would require careful
consideration. If it were to include more explicit guidance on
how long rates might stay on hold, that would be a sign the
bank is more dovish than in September.

MARKET IMPACT:

Markets are likely to react more to the details of the
statement than to the rate decision itself, which is widely
expected to uphold the status quo.

If the growth forecasts and global outlook are more dovish
than the average market view, the Canadian dollar could be
bumped lower versus the U.S. dollar and bond yields could fall
as investors see little chance of another rate hike any time
soon.

Conversely, if the bank emphasizes the upside potential to
Canada’s recovery, it would signal an earlier rate hike and
push the Canadian dollar higher.
(Reporting by Louise Egan; editing by Peter Galloway)

RPT-PREVIEW-Bank of Canada seen holding rates steady on Oct 19