UPDATE 4-Canada holds rate unchanged, unlikely to move soon

* Bank of Canada says to carefully consider more hikes

* Bank cuts growth forecasts for 2010 and 2011

* Bank says global recovery to be weaker than expected

* Dealers see no additional rate hike this year
(Adds forecasts from Reuters poll of primary dealers)

By David Ljunggren

OTTAWA, Oct 19 (BestGrowthStock) – The Bank of Canada kept its
benchmark interest rate unchanged at 1 percent, as expected, on
Tuesday and cut growth forecasts, but surprised markets with a
dovish statement suggesting rates will stay on hold.

The Canadian dollar fell to its lowest level in a month, on
the growing feeling that the central bank, which raised rates
three times in a row between June and September, would now keep
them steady for some time.

“At this time of transition in the global recovery, with a
weaker U.S. outlook, constraints beginning to moderate growth
in emerging market economies, and domestic considerations that
are expected to slow consumption and housing activity in
Canada, any further reduction in monetary policy stimulus would
need to be carefully considered,” it said in a statement.

A Reuters poll of Canada’s 12 primary securities dealers
showed none expected a rate hike in December, but five
predicted a raise in the first quarter of next year.

Based on a Reuters calculation, the market is pricing in an
95.19 percent chance rates will remain on hold at the Dec. 7
rate decision (BOCWATCH: ).
For a graphic comparing Canadian and U.S. interest rates, see

The bank cut its 2010 growth forecast to 3.0 percent from
the 3.5 percent it forecast in July, and cut its 2011 forecast
to 2.3 percent from 2.9 percent. It raised its prediction for
2012 growth to 2.6 percent from 2.2 percent.

The Canadian dollar dropped to around C$1.0360 to the U.S.
dollar, or 96.52 cents, from Monday’s close of C$1.0141 to the
U.S. dollar, or 98.61 U.S. cents. It later recovered slightly.

“This is not just a data-watching central bank that is
keeping its powder dry in order to evaluate developments over
coming months — this is a central bank that has totally
revised its outlook and market guidance,” said Derek Holt and
Gorica Djeric of Scotia Capital.

“To us, the Bank of Canada is saying they are on hold until
late next year.”

The central bank had taken a cautious line last month as
well, hinting that it was unlikely to keep raising rates while
the U.S. Federal Reserve seemed set to ease policy further.

“While Canada’s circumstances … dictate a different
policy stance than in the United States, there are limits to
this divergence,” Bank of Canada Governor Mark Carney said on
Sept 30.

Carney has frequently expressed concern about rising
Canadian debt rates, fueled in part by the low cost of

The bank said weak labor markets and “ongoing deleveraging”
as advanced economies scale back stimulus packages and rein in
debt and budget deficits would bring a weaker-than-projected
recovery in the United States, Canada’s main export market.

“Heightened tensions in currency markets and related risks
associated with global imbalances could result in a more
protracted and difficult global recovery,” it added.

Forecasting somewhat more subdued inflation, the bank said
it would take until the end of 2012 for core and total
inflation to converge at its 2 percent target. It previously
forecast both rates near 2 percent until the end of 2012.

“The inflation outlook has been revised down,” it said.

Core inflation, which strips out volatile items and the
effects of tax changes, was 1.6 percent in August, while
overall inflation was 1.7 percent. September inflation figures
are due for release on Friday.
(Additional reporting by John McCrank; editing by Janet

UPDATE 4-Canada holds rate unchanged, unlikely to move soon