Instant View: Canada keeps rates steady, says weak inflation still a risk

TORONTO (Reuters) - The Bank of Canada maintained its neutral stance on interest rates on Wednesday and flagged the risk of weak inflation even though it expects the main measure of prices to approach the bank's 2 percent target in coming quarters due to temporary factors. COMMENTARY PAUL FERLEY, ASSISTANT CHIEF ECONOMIST AT ROYAL BANK OF CANADA: "Not any huge surprises, obviously interest rates were held steady but all the interest is on the characterization of the economy. On that front, they have acknowledged that recent inflation numbers have come in a bit stronger than expected, though still not assuming that inflation gets back to the mid-range target until the end of next year. On a core basis they still have it gradually inching towards 2 percent, now showing it in the first quarter of 2016." "The tone is maybe less concerned about downside risk to inflation, although they are quite clear that inflation will remain below target." "Little change in terms of their read on the economy other than acknowledging some recent numbers, but it really hasn't altered their longer-term view, still maintaining a neutral bias with no change in interest rates imminent." DEREK HOLT, ECONOMIST AT SCOTIABANK: "It was as expected, dovish, and backed up by the details. The key is that they retained that final sentence about how they are still ambivalent with respect to the next direction of rate changes, but I think they've just strengthened their 'long pause' argument and I think they are going to take their time to evaluate the economy before they consider a rate move." "It's not certain (that the next rate move will be a hike) but I think it is highly likely. There is still a remote chance, some non-zero probability, maybe 20 or 30 percent at most, that a rate cut scenario could be in the cards, but I think that is unlikely, and opposed to our forecast that says it will take a couple of years before they start to turn around to rate hikes." "(The Canadian dollar) doesn't like it so far, it's off about 0.4, so less than half a cent, off the report. What this means going forward is that the Canadian dollar still remains overvalued against the U.S. currency, and in my opinion as the Federal Reserve shifts towards less stimulus and then outright tightening, the Bank of Canada is going to lag well behind that, and that is significantly bearish for the Canadian dollar even from current levels." "We have past precedent that supports (the monetary policy lag). Back in 1999 and 2004, I think it was, when the Bank of Canada lagged the Fed, and to me the argument for a longer and bigger policy lag by the Bank compared to the Fed is greater than it has ever been. And that's because we're at cycle tops in this country on the two main drivers of growth, resource investment and household sector, whereas the U.S. is still in the early days of exploiting growth opportunities and releasing pent up demand from the past few years." DOUG PORTER, CHIEF ECONOMIST, BMO CAPITAL MARKETS: "I think it was a bit of a mixed message overall. I don't really find anything especially surprising." "Obviously they're still concerned about relatively low inflation, but it does look as if their concern on that front is easing a bit. And it does look like the output gap might close a little bit earlier than they had initially expected." "The reality is inflation's been higher than expected in the last few months and we've had a big bump up in energy prices, so I think it would be denying the obvious if inflation wasn't a little less of a concern." "They can't ignore headline inflation if energy and food prices start to run wild. They can't turn a blind eye to that, but they would largely focus on the core inflation outlook (for monetary policy)." (Reporting by Alastair Sharp, Andrea Hopkins and Cameron French; Editing by Jeffrey Hodgson)