Bank of Canada to assess need for low rates, C$ jumps

(Adds economist comments)

By Rod Nickel

The Bank of Canada will assess
whether it needs to keep interest rates at near-record lows as
the economy continues to grow, a senior official said on Monday,
raising the prospect that a rate hike could come sooner than
anticipated and lifting the Canadian dollar.

The change in tone for the central bank, which said earlier
this year rate cuts remained on the table, sent the Canadian
dollar to its strongest level against the greenback since
April 18.

In the bank’s most upbeat comments on the economy, Senior
Deputy Governor Carolyn Wilkins said first-quarter growth was
“pretty impressive,” while there were encouraging signs growth
was broadening.

“As growth continues and, ideally, broadens further,
Governing Council will be assessing whether all of the
considerable monetary policy stimulus presently in place is
still required,” Wilkins told a business audience.

Wilkins said Canada had largely adjusted to a drop in oil
prices that prompted the bank to cut rates twice
in 2015, to 0.50 percent, to bolster the economy, which slipped
into a brief recession.

The speech’s hawkish tone is the first acknowledgement from
the bank that the next move is likely to be a hike, said Royce
Mendes, senior economist at CIBC Capital Markets.

The bank makes its next rate decision on July 12. While many
economists had expected the bank to start raising in 2018,
markets were pricing in a 52 percent chance of a hike by the end
of 2017 following Wilkins’ speech.

“It looks as though the bank is looking to shift gears,”
said Benjamin Reitzes, senior economist at BMO Capital Markets.

“There’s a decent chance that if things go right over the
next few months, rate hikes could be coming sooner than
everybody thought.”

Wilkins acknowledged tax and trade policies in the United
States will likely remain an important uncertainty in the bank’s
outlook and it will be difficult to gauge the impact without
more information.

She added, “life goes on and decisions must be made in the
meantime.”

Even if only a few sectors were expanding enough to absorb
excess capacity, the bank would need to take the appropriate
monetary policy action to meet its 2 percent inflation target,
she said.

Inflation is currently at 1.6 percent, thanks in part to
slack in the economy, Wilkins said. She noted other indicators
also point to ongoing spare capacity, including only moderate
growth in wages.
(Reporting by Rod Nickel; Writing by Leah Schnurr and David
Ljunggren in Ottawa; Editing by Dan Grebler and James Dalgleish)