Bank of Canada rate hike now more distant

OTTAWA: Bank of Canada Governor Mark Carney, in his first remarks since the recent global turmoil began, backed away from previous language that had suggested an interest rate hike was coming relatively soon.

Following are hints to his thinking, which he provided in testimony before a rare summer meeting of a parliamentary committee on Friday.

LIKELIHOOD OF DELAYS

* In May the central bank had said monetary stimulus would be "eventually withdrawn"; in July it said it would be "withdrawn" as long as growth continued; he now spoke of "the possible withdrawal of any degree of monetary stimulus".

* Says the bank will be "prudent" on any withdrawal.

* Several downside risks to the July Monetary Policy Report have been realized.

* Downgrades second-quarter growth forecast from 1.5 percent to "minimal to slightly negative growth".

* Considerable external headwinds "are now blowing harder".

* There is "a little tightness in financial conditions."

* The "persistent strength" of the Canadian dollar is compounding the effect of sluggish US demand.

* Delicate European debt situation hasn't yet been fully addressed.

ARGUMENT FOR EVENTUAL HIKE

* Says Bank of Canada will not be constrained by the US Fed's conditional plan to keep rates low for two years: "We do not outsource monetary policy to the Federal Reserve."

* Renews warning to households taking loans and mortgages that they should bear in mind that rates will not stay low forever.

* The broad outlines of the July Monetary Policy Report projections still hold.

* Still expects growth to accelerate in the second half of the year.

* Output gap is only 1 percent.

* July inflation numbers are consistent with forecast.

* Commodity prices to remain relatively elevated.

* Sees reasonable but not torrid US growth

DOESN'T RULE OUT RATE CUTS

* Does not specifically speak about rate cuts, which are currently priced into the market but does conclude his introductory remarks by saying "the bank has a wide range of tools and policy options that it will continue to deploy as appropriate."

* Still sees growth in the United States, Europe and Canada.

Background:

* Bank of Canada was the first among the Group of Seven leading industrialized nations to raise its target overnight rate, increasing it three times in 2010, to 1 percent.

* Its remaining rate decisions this year are Sept. 7, Oct. 25 and Dec. 6.

Copyright Reuters, 2011