Suffering Canadian dollar fuels calls for central bank to stand pat on rates

OTTAWA (Reuters) - The Canadian dollar's speedy plunge to a 12-year low has fueled calls from some market and industry players for the country's central bank to hold interest rates steady, even as traders increase bets on a cut this week.

With weaker oil prices knocking the currency to new lows nearly every day this month, some are arguing another cut could destabilize the currency, doing more harm than good.

Rather than helping exporters, the loonie is now cutting into margins as U.S. clients demand cheaper prices, some experts said, adding that it is lifting input prices and weakening investment sentiment.

"A growing number of people are advising against a rate cut," said Stefane Marion, chief economist at National Bank Financial.

"Rarely do we see the currency as being probably an important point of discussion during a Bank of Canada rate decision, but I believe this is one of those times."

The median forecast in last week's Reuters poll was for the bank to hold on Jan 20. Seven of 40 analysts expected a cut. [ECILT/CA]

Since then, markets have upped the odds of a rate reduction, putting the likelihood at 64 percent.

Rate cut expectations have risen as the price of oil , a major Canadian export, sinks further. Oil prices hit their lowest level since 2003 on Monday. [O/R]

In addition to oil, the currency has also been pressured by a broader rise in the greenback as the U.S. Federal Reserve tightened policy for the first time since the financial crisis. Interest rate hikes tend to support currencies, while cuts often weaken them.

The Canadian dollar, nicknamed the loonie, lost 16 percent against the U.S. dollar last year and is down nearly 5 percent this month alone.

The rapidity of the drop makes it difficult for exporters to price their contracts, said Jayson Myers, president of the Canadian Manufacturers and Exporters association.

"Right now a lot of businesses would put a premium on stability rather than see a further rate cut."

Even some who are forecasting a cut argue the bank should not act.

Doug Porter, chief economist at BMO Capital Markets, said the plunge in the loonie and financial stability concerns are reasons for the bank not to cut, although he expects it will.

"We may well be wrong in our call, but it seems to me over the last year the bank has not really been overly concerned about the currency.

(Editing by Jeffrey Hodgson and Lisa Shumaker)

By Leah Schnurr