* Carney emphasizes C$ impact on growth, inflation
* Japan quake seen cutting Q2 growth by 0.5 percentage pts
* BoC says export rebound unlikely to be sustained
* Inflation tame, bank sees return to target by mid-2012
* Markets trim bets on scope of 2011 rate hikes (Recasts with Carney news conference)
By Randall Palmer and Louise Egan
OTTAWA, April 13 (Reuters) - Canada's strong currency is dampening economic growth and keeping inflation low, Bank of Canada Governor Mark Carney said on Wednesday, reinforcing expectations that he won't hike interest rates next month.
In a news conference following release of the central bank's quarterly Monetary Policy Report (MPR), Carney was asked whether the sharp appreciation of the Canadian dollar was effectively tightening monetary conditions, allowing the bank to delay rate hikes. [ID:nN13293182]
"We have to take all factors into account and certainly one of the most important factors at the moment are the strong headwinds the Canadian economy is experiencing now and will in the future from the persistent strength in the Canadian dollar," Carney said.
"In the report this is not just a factor that is in the base case projection but it's also an additional risk to the outlook to growth and inflation in Canada," he added.
It was the second straight day central bank voiced its concerns about Canada'a soaring currency, which last week hit a 3-1/2 year high against the U.S. dollar.
Analysts said the bank's discomfort with the strength of the currency has grown in recent months, evidenced by its repeated references to the exchange rate in Tuesday's policy announcement, the MPR, and Carney's news conference.
"The loonie's flight plan now appears to be even more of a critical factor affecting the future timing and magnitude of policy rate hikes," said Michael Gregory, senior economist at BMO Capital Markets. "But it won't prevent them."
The bank held its key overnight target steady at 1 percent on Tuesday. It has been on pause on rates since September after becoming the first central bank in the G7 to lift rates following the global crisis. [ID:nN12172793]
Analysts polled last week saw July as the most likely date for the next rate increase. [CA/POLL]
Swaps that trade based on expectations for the key policy
rate showed that after the MPR's release and Carney's comments
the market trimmed odds of a rate increase at each bank
decision date from May through December.
The Canadian dollar also hit a session low of C$0.9656 to the U.S. dollar, or $1.0356 after the news conference from C$0.9621 before the MPR release.
The bank's forecasts through to the end of 2013 assume gradual rate increases over that period, and the economy returning to full capacity by mid-2012.
Given that rate increases can take 12 to 18 months to feed through to the economy, some have speculated the bank would want to move in the current quarter if it wants to prevent the economy from overheating when it reaches full capacity at mid-2012. But Carney offered little guidance.
The bank said that inflation is tame now and will return to its 2 percent target by mid-2012, despite some short-term pressures from food and energy.
JAPAN EFFECT
Economic growth will fall sharply in the second quarter to an annualized 2 percent from 4.2 percent in the first due largely to the Japanese earthquake and the effects of the strong Canadian dollar on exports, the bank said.
The Japanese disaster will shave half a percentage point off growth in the second quarter, the bank estimated, due primarily to supply disruptions in the auto sector.
It saw that loss recovered in subsequent quarters.
The bank downgraded growth forecasts for every other quarter this year and next, compared with its January projections. It sees the economy expanding 2.7 percent in the final two quarters of this year.
Early evidence suggests that the strong rebound in exports will not continue and that net exports were a drag on first-quarter growth, it said.
The bank cited "ongoing competitiveness challenges, including headwinds from the persistent strength in the Canadian dollar, as well as the one-off nature of certain elements of the rebound" for the slower growth rates. (Editing by Jeffrey Hodgson and Peter Galloway)