RPT-PREVIEW-Bank of Canada seen raising rates on July 20

(Repeats July 15 preview without changes)

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

WHEN: Tuesday, July 20 at 9 a.m. (1300 GMT)

Thursday, July 22 at 10:30 a.m. (1430 GMT)

REUTERS FORECAST: A Reuters poll showed a 73 percent median
probability that the Bank of Canada will raise the overnight
rate by 25 basis points on Tuesday to 0.75 percent from the
current 0.5 percent. That view was unanimous among Canada’s 12
primary securities dealers. [CA/POLL]

More than half the 42 forecasters surveyed said the central
bank would not take all three subsequent opportunities this
year to raise rates, pausing at some point to take stock of the
recovery.

On economic growth forecasts, which the bank will reveal on
Thursday, Reuters polling yielded a median forecast of 3.3
percent growth in 2010 and 3.0 percent in 2011. [ECILT/CA]

FACTORS TO WATCH:

Next move: Canada’s robust recovery has made it the first
of the Group of Seven industrialized nations to hike benchmark
interest rates following the recession, starting on June 1. But
markets are hungry for any clues about the expected speed of
further monetary tightening this year and next.

The bank is not expected to provide any guidance on its
intentions for the next rate announcement on Sept. 8, due to an
unusually high degree of uncertainty about the outlook. In the
last rate-hiking cycle in 2006 the bank would say “some further
modest increases in the overnight rate may be required” to
steer markets in the right direction. But it is seen refraining
from that this time, keeping its options open for fear of
misfiring.

State of the recovery: The biggest potential flashpoint for
markets is the bank’s level of discomfort with the global risks
to the Canadian economic recovery. The domestic side of the
economy has been strong since the final quarter of 2009 thanks
to robust consumer spending and a hot housing market. The bank
has already flagged Europe’s sovereign debt problems as a big
threat but since the June 1 rate hike, there have been more
signs of weakness in the U.S. economy. [ID:nN07168558]

The bank may predict it will take longer than it previously
thought to absorb the slack in the economy, pushing back the
expected date for a return to full capacity to the third
quarter of next year instead of the second quarter.

It may also reiterate its disappointment that business
investment has not gained more momentum, a prerequisite for a
sustained recovery after monetary and fiscal stimulus vanish.
[ID:nN12185840]

Forecasts: As is customary, the bank will likely provide
annual economic growth forecasts in its brief rate statement
preceding the MPR. Its April projection of 3.7 percent average
growth this year is seen as optimistic due to signs the economy
is slowing after a stronger kick-off in the first quarter than
expected. It may also tweak its 2011 outlook.

In the more detailed MPR on Thursday, economists widely
predict a downgrade of its 3.8 percent second-quarter growth
forecast to closer to 3 percent. The revised outlook may show a
more pronounced cooling of growth rates in the second half of
this year.

However, the overall medium-term outlook will be relatively
unchanged as demand growth was brought forward to the earlier
part of the forecast period.

MARKET IMPACT:

Markets are pricing in a quarter-point rate increase on
July 20, so that alone will have little impact, with the focus
on the language in the accompanying statement.

If the bank signals increased concern about global risks or
the pace of the country’s rebound, the Canadian dollar could
slide in anticipation of a pause in the autumn. Bond yields
would also likely fall.

On the other hand, if the rate announcement and subsequent
MPR show the bank is sticking to its bullish outlook, the
currency could extend recent gains as investors bet on a
widening rate spread between the United States and Canada.
Stock Market News

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

RPT-PREVIEW-Bank of Canada seen raising rates on July 20