Bank of Canada pledges steady rates under explicit conditions

OTTAWA (Reuters) - The Bank of Canada pledged on Wednesday to keep its benchmark interest rate on hold as long as there is economic slack and weak inflation and households are managing their debt carefully, but also made clear that the next move is likely a hike, not a cut.

The first policy decision under new central bank chief Stephen Poloz, who took over in June, delivered roughly the same message as his predecessor Mark Carney did in the prior year -- it is just a matter of time before borrowing costs start to rise.

However, Poloz was explicit in conditioning the continuation of steady rates on three key factors.

"As long as there is significant slack in the Canadian economy, the inflation outlook remains muted, and imbalances in the household sector continue to evolve constructively, the considerable monetary policy stimulus currently in place will remain appropriate," the bank said.

"Over time, as the normalization of these conditions unfolds, a gradual normalization of policy interest rates can also be expected, consistent with achieving the 2 percent inflation target," it said.

The bank has held its overnight rate at 1 percent since September 2010, the longest pause in monetary policy since the 1950s.

The bank also sharply cut its forecast for second-quarter economic growth to 1 percent from 1.8 percent, largely due to the impact of catastrophic flooding in Alberta and striking construction workers in Quebec. But it said growth would more than compensate for those losses in the third quarter, growing 3.8 percent instead of 2.3 percent as previously estimated.

Therefore it said it would "look through" the volatility of these two quarters.

Overall, the bank's growth outlook through 2015 is little changed from April and it continues to expect the economy to return to full capacity and inflation to rise to its 2 percent target by mid-2015.

One key change in language from previous statements is that it no longer referred to the "persistent strength of the Canadian dollar," reflecting the weakening of the currency since the bank's April Monetary Policy Report.

(Reporting by Louise Egan; Editing by Randall Palmer)

Source: http://news.yahoo.com/bank-canada-pledges-steady-rates-under-explicit-conditions-140346281.html

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