Three things to look for in the BoC rate decision

  Bank of Canada Goveror Mark Carney.

Economists will be paying close attention to the Bank of Canada’s interest rate announcement Tuesday, but not because they’re looking for a rate hike.

The main focal point will be changes to the bank’s growth and inflation outlook, as well as the balance of risks. Below we outline three things economists will be looking for during the bank’s announcement.

Dovish or hawkish?

As far as the overnight lending rate, which is currently at 1%, the likelihood of a surprise hike (or cut) on Tuesday is nearly nil, said Avery Shenfeld, chief economist with CIBC Economics.

But Tuesday’s announcement will likely bring a change of tone, he added.

“Given developments since the prior issue, Governor Carney’s team has no choice but to alter its message and, in the process, sound just a shade less dovish,” Mr. Shenfeld said.

Diana Petramala, economist at Toronto-Dominion Bank, expects the language to signal that the bank will keep rates unchanged for the rest of the year.

“The Bank of Canada is also unlikely to cut rates with domestic demand accelerating and with inflation at the Bank of Canada’s 2.0% target,” she wrote in a recent note. “Rather, the Bank of Canada is likely stay the course through 2012.”

Economy and risks

The past year has seen the Bank of Canada note the ongoing risks that the eurozone crisis and a tepid U.S. recovery pose to Canada. Economists will be dissecting its latest language to see whether the bank has spotted any silver lining, or whether it continues to maintain a gloomier outlook.

“We expect greater consternation with respect to Europe, Asia, and the United States as well as continued concern about domestic households,” economists at U.S.-based Citigroup said.

That will also impact the country’s businesses, Citi economists said.

“The bank probably will also note modest tightening in credit conditions for firms and softening in sales expectations.”

Inflation

Economists don’t expect the Bank of Canada to signal a warning on inflation, despite economic pressures weighing on all sides this year.

“The bank probably will indicate that risks to the inflation outlook, though elevated and myriad, remain roughly balanced,” economists at Citi said.

Inflation hit 2.9% in November, the most recent data from Statistics Canada showed, although those levels are still within the 1-3% target the Bank of Canada maintains. Food and gas prices were the biggest factors in inflation growth.

Citi does foresee some positive inflationary effects for the economy, however. With geopolitical risks in Asia and the Middle East, in particular Iran, higher oil prices could conspire to boost some aspects of the Canadian economy this year, Citi economists said.

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