UPDATE 2-Bank of Canada holds rate-hike bias, eyes on Poloz

Wed May 29, 2013 9:47pm IST

* Rate hike still likely after a period of time-central bank

* First-quarter growth beats expectation, inflation weaker

* Carney stays course ahead of exit to run Bank of England

By Louise Egan and Randall Palmer

OTTAWA, May 29 (Reuters) - The Bank of Canada clung on Wednesday to its year-long message that its next move on interest rates would be a hike, staying the course in the final decision under outgoing Governor Mark Carney and leaving any change in stance to his successor.

As expected, the central bank held the key policy rate at 1 percent, extending a nearly three-year freeze on rates, the longest since the 1950s.

It cited continued slack in the economy, a muted outlook for inflation, and slower debt buildup by Canadian households as justification for keeping rates unchanged for now.

The "considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required," it said.

Governor Carney is stepping down and will begin a five-year term as Bank of England governor on July 1.

Canada's central bank is the only one in the Group of Seven industrialized nations to signal that its next move will be a rate increase, while the U.S. Federal Reserve and other central banks continue to pump stimulus into the global economy through massive bond-buying campaigns after slashing rates to zero.

The forward guidance was identical to that in the bank's last rate decision on April 17, and sets the stage for the bank's next governor, Stephen Poloz, to oversee any policy shift after he takes over on Monday.

Markets are looking to Poloz's testimony to a parliamentary committee on June 6 and his first speech as governor June 19 for clues on his thinking.

His first rate decision will be on July 17.

"Obviously, Mr. Carney did not care to make any waves in his last meeting," said Doug Porter, chief economist at BMO Capital Markets, who last week said the central bank should drop its tightening bias.

"We have that (next) hike so far down the road that little tweaks in the language weren't going to affect that view in any event," he said.

The Canadian dollar briefly touched a session high of C$1.0350, or 96.62 U.S. cents, versus the U.S. dollar after the news, before giving up those gains.

Market participants had largely expected the bank to stay the course as Carney exits, but some players saw an outside chance the bank would drop its tightening bias altogether because of very low inflation and uncertain outlook for growth.

The Bank of Canada has been signaling for more than a year that it intends to lift borrowing costs, but has gradually softened its tone to indicate any move would be far in the distance.

Economists don't expect an increase until the final quarter of 2014, according to a median forecast of 34 analysts in a Reuters poll earlier this month.

PRESSURE ON POLOZ

Incoming Bank of Canada Governor Stephen Poloz, currently head of the country's export credit agency, could come under pressure to shift towards neutral language on rates given low inflation. But such a change is far from certain.

"I don't anticipate any major shift when Poloz takes over the helm," said Derek Burleton, deputy chief economist at Toronto-Dominion Bank. "There hasn't been any heightened pressure to change their stance based on recent developments."

Canada's economy has long recovered from the 2008-09 recession but growth slowed to a crawl in the second half of last year. There are early signs of a rebound this year.

The bank said growth in the first quarter likely surpassed its projection of 1.5 percent, annualized, but said growth in 2013 as a whole looked broadly in line with its 1.5 percent expectation.

Inflation has been slightly weaker than it had expected; the annual rate fell to 0.4 percent in April, well outside the bank's targeted range of 1 to 3 percent.

But the bank maintained its forecast for total consumer price index inflation and core inflation to rise to the 2 percent target by mid-2015.

Household debt, a huge concern for the central bank and the government since the recession, is becoming less of a concern.

The bank said total household credit growth is slowing and repeated that it expects the household debt-to-income ratio to stabilize near the current level of 165 percent.

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