* Carney says growth, inflation firmer than expected
* Broad brush of recovery in line with projections
* Rate hike expectations rise after comments
* April 22 report will provide more rate guidance (Adds market reaction, details)
By Louise Egan
OTTAWA, March 24 (Reuters) - Canadian growth and inflationare firmer than expected, Bank of Canada Governor Mark Carneysaid on Wednesday, but he highlighted other factors that coulddiscourage the bank from raising interest rates earlier thanexpected to cool the economy.
After giving a speech perceived as slightly more hawkish onraising rates, Carney held a news conference in which he soughtto dampen any market expectations that he could raise borrowingcosts as early as June.
When the bank cut its key rate to 0.25 percent last April,it took the unusual step of committing to hold rates at thatlevel until the end of June this year, conditional on inflationstaying on track.
It has repeated that pledge at every chance but someinvestors began to suspect a bias towards an earlier rise inrates due to stubbornly firm core inflation and a string ofsurprisingly strong economic indicators.
Carney said the big picture was unfolding largely asexpected, or only slightly stronger, and that people should notoverreact to his comments.
"People should just take a step back, there hasn"t been afundamental change in the underlying dynamics here and thosedynamics are pretty broad brushed," Carney told reporters.
"The underlying dynamics affecting inflation haven"tchanged, including the starting point which is an economy witha fair degree of slack in it, a considerable degree in it, bothin the labor market and capacity in general," he said.
Nonetheless, markets were pricing in a slightly greaterchance of credit tightening than before Carney spoke.
"For markets, the inclination is going to be to pullforward rather than push back the probability of a rate hikeout of the BoC given the better than expected economic andinflation performance," said Stewart Hall, markets strategistat HSBC Canada.
"Still, the overall market response has been largely mutedin keeping with the limits of the information provided," hesaid.
Yields on overnight index swaps, which trade based onexpectations for the Bank of Canada"s key policy rate, edgedhigher after the speech was published, showing the market sawcredit tightening as more likely than before Carney spoke.
The market suggests there are high odds the central bankwill hike rates by 25 basis points in July and lift its keyrate to 1 percent by October. BOCWATCH
The Canadian dollar firmed slightly after the speech andnews conference, rising to C$1.0234 to the U.S. dollar fromabout C$1.0250 just before.
AVOIDING A FRENZIED RUSH TO EXITS
Scotia Capital economist Derek Holt sees a second-quarterrate hike as probable and believes Carney carefully managed hismessage on Wednesday in an attempt to prevent markets fromracing ahead of themselves.
"The danger on stimulus withdrawal is to have marketsrapidly price in a full cycle"s worth of hikes, and much of themessaging in this speech is oriented toward ensuring this isdone in as mild a manner as feasible," Holt said.
More answers on the bank"s intentions will come on April 22when it updates it forecasts, two days after an interest rateannouncement where it is expected to keep rates unchanged.
Core inflation was higher than expected in both Februaryand January, but the one-time effects of higher hotel ratesduring the Winter Olympics in Vancouver had many wonderingwhether the central bank would shrug off the data.
Carney acknowledged some of the price pressures weretransitory but said to stay tuned for more details in April.
In a sign of heightened market hunger for any hint from thebank, some found a veiled signal of an imminent rate hike inCarney"s use of new language in describing the low rate pledgeas "expressly conditional".
Carney downplayed the wording change but then said: "It"snot a promise, it"s an expectation. We"ll update that in Apriland lay out that view in more detail." (Additional reporting by David Ljunggren and Toronto treasuryteam; editing by Peter Galloway)
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