BOC Governor Signals July Rate Rise in Play -- Update

By Paul Vieira Features Dow Jones Newswires

Bank of Canada Gov. Stephen Poloz said excess slack in the Canadian economy is now being absorbed "steadily," and that must be taken into account when the central bank issues a rate decision next month.

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His comments in Portugal, during an interview with CNBC Europe that aired Wednesday, suggest an interest-rate increase July 12 remains in play, after elevated expectations cooled following subdued inflation data for May. Traders responded accordingly, with the Canadian dollar rising against the U.S. dollar and government of Canada bond yields climbing in early Wednesday trading.

Mr. Poloz said growth would decelerate following a strong 3.7% annualized gain in the first quarter, but he said he doesn't envisage a "dramatic" slowdown.

Growth, he said, would register at a "more normal pace but still above potential. That's the important thing. That means that we're absorbing excess capacity that was built up in the wake of the crisis and then built up again in the wake of the oil shock two years ago."

When pressed on how that would impact the central bank's policy-rate decision next month, Mr. Poloz said Bank of Canada officials "need to be at least considering that whole situation now that the excess capacity is being used up steadily."

Economists at BMO Capital Markets said Mr. Poloz's comments "is a pretty solid signal that a July rate hike is very much on the table." On the overnight-index swap market, traders Wednesday priced in roughly 70% probability of a rate increase July 12, up from a roughly 40% probability the previous day.

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Investors warmed up to the Canadian dollar immediately, pushing the currency to a four-month high after Mr. Poloz's comments. The loonie was trading at about 76.31 U.S. cents early Wednesday, from 75.74 U.S. cents late Tuesday.

Meanwhile, Canadian bond yields rose sharply, with the front end outperforming the rest of the curve, according to CanDeal. The yield for Canada's two-year bonds was at 1.017% from 0.964% on Tuesday, while the 10-year bond was yielding at 1.599% from 1.565%. Bond yields move inversely to price.

Mr. Poloz and the Bank of Canada's No. 2 official, Carolyn Wilkins, rattled markets in June with commentary that signaled the bank was setting the groundwork to raise its benchmark rate.

Both Mr. Poloz and Ms. Wilkins said rate cuts they delivered in 2015 to offset the negative shock from the commodity-price swoon have worked, with the economy now growing at a firmer pace and broadening on a sectoral and regional basis. Ms. Wilkins said it's time to assess whether rock-bottom rates are still necessary.

Mr. Poloz is scheduled to participate in a panel later Wednesday morning at a European Central Bank conference, while Bank of Canada deputy governor Lynn Patterson is set to deliver remarks Wednesday afternoon in Calgary, Alberta.

David George-Cosh contributed to this article.

Write to Paul Vieira at paul.vieira@wsj.com

(END) Dow Jones Newswires

June 28, 2017 10:09 ET (14:09 GMT)