The Bank of Canada finds itself in an "uncomfortable situation" as it prepares to release its policy statement tomorrow, followed by its monetary policy report a day later.
Canada's central bank is not in the same situation as others, and is rather in something of a juggling act. It won't change its benchmark overnight rate from its current 1%, but markets are watching for any change in language.
For now, Governor Mark Carney and his colleagues on the central bank's rate-setting panel are tilting toward their next move being a rate hike, though the timing is in question. Economists are watching for a change in that stance tomorrow, and Royal Bank of Canada believes it's a "very close call."
Carney will remain ready to tighten monetary policy and hike the bank's benchmark overnight rate, though not any time soon, and is not leaning toward a cut, as some observers believe. This is seen as a mild bias toward tightening monetary policy.
Exactly when, and by how much, will depend on their forecasts for economic growth, among other factors.
Not everyone agrees Carney will stick to the current line.
"There is some doubt on whether the Bank of Canada will maintain its (very mild) tightening bias," said deputy chief economist Douglas Porter of BMO Nesbitt Burns, referring to the speculation in the markets.
"It already took a step back in June, with the phrase 'to the extent that the economic expansion continues and the current excess supply in the economy is gradually absorbed,'" Mr. Porter said, citing the central bank's policy statement at the time.
"There is certainly a strong case to shift back to neutral: 1) In recent weeks, almost every major central bank in the world has eased policy amid slower global growth. 2) Canadian GDP likely grew at less than a 2% pace in [the first half of the year], versus the bank’s forecast of 2.5%. 3) Ottawa’s steps to tighten mortgage insurance rules (and thus dampen the housing market) ease the bank’s biggest domestic concern. The case for keeping the bias is that it is already very mild, and the bank doesn’t want to be seen flip-flopping."
