Economists are expecting the Bank of Canada to sit tight on rates next week. The question is whether the accompanying policy statement, or its Monetary Policy Update will signal a change in direction.

In a research note, HSBC Securities (Canada) Inc., says that current monetary policy is “neither onerously tight nor irresponsibly loose. To be certain, challenges continue to buffet the Canadian economy. The golden years of the commodity boom appear to be waning, the Canadian dollar remains challenging and globalization continues to realign the world.”

“However, the Bank’s own business outlook survey supported its view that the economy would continue modulating around full capacity with businesses remaining reasonably optimistic on future sales. Additionally, employment growth in the first half of 2006 was extraordinarily strong, domestic demand remains frothy, the U.S. economy is looking more like a soft landing and the loonie is beginning to roll over,” it says. “Against this backdrop, the Bank is likely willing to let its rate policy idle and allow trends to continue developing.”

TD Bank agrees that the Bank of Canada will keep its overnight rate unchanged at 4.25% next week. “However, the devil is in the statement, and we believe the odds are high that the Bank will suggest that the risks to its forecast are starting to tilt to the downside,” it says.

“If the Bank does change its take on the economy, the issue is whether it will change its outlook for growth outright, or whether it will merely point to the downside risks that have emerged over the past few months,” TD notes. “In our view, a significant change in the Bank’s base-case forecast is still quite unlikely – though not impossible. However, we would view the odds of a reference to the downside risks as fairly significant – and that could reinforce market expectations that the Bank could be in easing mode before too long.”

BMO Nesbitt Burns says that the market is unanimous in expecting no change in rates. “While the domestic housing market may be a bit hot for comfort, and core CPI may be a bit higher than the Bank would like, the recent slide in energy prices combined with the sticky Canadian dollar will help keep the Bank glued to the sidelines for some time yet,” it adds. The Bank is likely to fine-tune its economic outlook in the semi-annual Monetary Policy Report, due out next week too, BMO Nesbitt suggests.