* 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 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
"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
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
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.