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Mark Carney signals interest rates to rise Add to ...

The Bank of Canada kept its benchmark lending rate at an historic low Tuesday, but removed a so-called conditional commitment to stay on hold through the middle of the year, signalling that it could raise interest rates as early as its next policy decision June 1.

In the statement accompanying Tuesday's decision, Governor Mark Carney and his rate-setting panel said they expect the economy to return to full capacity in the second quarter of next year, rather than the third as previously forecast.

That shows the central bank believes that slack created by the country's first recession since the early 1990s, and the sharpest global downturn since the Great Depression, is being absorbed more quickly than policy makers had predicted.

At the height of the global crisis in April, 2009, the central bank cut the benchmark overnight rate to the lowest it could go, 0.25 per cent, and pledged to keep it there until at least the middle of this year, depending on inflation. The removal of that pledge increased investor bets that the first rate hike will be on June 1, rather than July 20 or later, and sent the currency shooting through parity with the U.S. dollar because it now seems certain the Bank of Canada will act long before the U.S. Federal Reserve.

``A June rate hike is now likely,'' said Doug Porter, deputy chief economist at the Bank of Montreal. ``This statement marks a dramatic change in tone by the Bank, and doesn't rule out possible 50-basis-point moves.''

Tuesday, Mr. Carney said that his "extraordinary guidance" has achieved its purpose, as the reliably low cost of money has spurred more borrowing and spending than expected since late last year.

"This unconventional policy provided considerable additional stimulus during the period of very weak economic conditions," the central bank said. "With recent improvements in the economic outlook, the need for such extraordinary policy is now passing, and it is appropriate to begin to lessen the degree of monetary stimulus."

The statement said that core inflation, the bank's preferred gauge that has been ``somewhat firmer than projected in January,'' will ``ease slightly'' in the current three-month period while staying close to the bank's 2-per-cent target until the end of 2012. The total inflation rate will be ``slightly higher'' than 2 per cent over the next year and return to the target level in the second half of 2011, the bank said.

Central bankers also tweaked their growth projections for the economy, reflecting a wave of stronger-than-expected data in recent months both in Canada and abroad and a white-hot housing market that point to a ``more front-loaded'' expansion.

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The economy will grow by 3.7 per cent this year, as opposed to the 2.9 per cent projected in the bank's last quarterly forecast in January, and 3.1 per cent in 2011, instead of 3.5 per cent. It will then grow 1.9 per cent in 2012, the bank said.

Mr. Carney will release the full report fleshing out his new forecasts Thursday.

Although Tuesday's statement presents a broadly more upbeat view of Canadian and global prospects, the usual caveats remained.

Global growth has been stronger than projected in January, driven by the world's emerging-market economies. But in many countries that is still due to ``important support'' from government spending and relatively low borrowing costs, and in advanced countries growth will be ``relatively subdued'' as stimulus spending fades and governments grapple with the massive debt they've incurred to revive their economies.

``Despite recent progress, considerable uncertainty remains about the durability of the global recovery,'' the central bank said.

For Canada, the ``persistent strength'' of the Canadian dollar , the country's meager gains in labour productivity, and weak demand from the crucial U.S. market ``will continue to act as significant drags'' on the economy.

The ``extent and timing'' of interest-rate hikes will depend on the outlook for growth and inflation, the central bank said. Crucial in this calculation could be the next two inflation reports from Statistics Canada, including one this Friday, and what happens in the coming days with the Canadian dollar, economists said.

The central bank's statement also said policy makers won't be undertaking any more of the so-called ``purchase and resale agreements'' that were used during the crisis to inject liquidity into the financial system and to help reinforce overnight lending rates between commercial banks.

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