* BoC No. 2 Tiff Macklem is clear front runner
* Macklem sees eye-to-eye with Carney on policy
* Would likely maintain plan to hike rates eventually
* Other names include Don Drummond, Jean Boivin
By Randall Palmer
OTTAWA, Nov 26 The Bank of Canada's senior deputy governor, Tiff Macklem, is the early favorite to replace Mark Carney as the head of the central bank, pointing to a steady-as-she-goes policy that points eventually to higher interest rates.
The policy picture would be less clear, however, if an outsider were brought in for the top Bank of Canada job, something that the bank has done on the last two occasions.
"He's been very involved with the governor since the credit crunch began, and we know that the two see eye-to-eye on many of the dynamics that are occurring in Canada right now," Ian Pollick, fixed income strategist at RBC Capital Markets, said of Macklem.
That said, the uncertainty introduced with the surprise appointment of Carney to the Bank of England weakened the Canadian dollar and boosted bond prices as markets bet on a chance, however slight, of a more dovish policy.
The Bank of Canada stands apart from other major central banks in that it avoided large bouts of quantitative easing and now insists the next move in interest rates is likely to be up.
It presided over a relatively quick recovery from the world economic crisis, with no Canadian bank having needed a government bailout. Canada's resource-rich economy has driven growth as other industrialized countries have struggled, and the country's property market avoided the excesses that plagued the United States, allowing Canada's banks to avoid losses.
Arguing in favor of choosing from within the bank for a new chief is the need to maintain morale, after the bank's senior deputy governor was passed over for outside candidates in the last two appointments -- David Dodge in 2001 and Mark Carney in 2008.
"Every so often at least you have to go internal just for long-run morale considerations," said Bill Scarth, economic policy expert at McMaster University in Hamilton, Ontario, and at the C.D. Howe Institute in Toronto. "Otherwise, when people get senior they start looking for another job."
And given that Macklem became senior deputy governor only in July 2010, it would be "awkward to all of a sudden jump somebody over him unless it's an outside person," Scarth said
Macklem, 51, is currently the bank's chief operating officer and has been actively involved at the global Financial Stability Board, where he chairs a committee on standards implementation. He was previously the associate deputy minister at the Finance Department and was Canada's Group of Seven deputy.
Under Carney, the Bank of Canada was the first in the G7 leading industrialized nations to raise its reference rate from the rock-bottom level in the global financial crisis. It has held the rate at 1 percent since September 2010.
In April it signaled a rate hike might become appropriate, something it now says will happen "over time," making it an outlier in a G7 more focused on continued stimulus.
The median view in an Oct. 24 Reuters survey of primary dealers is that the next rate hike will not be until the fourth quarter of 2013.
Another possible candidate is insider-outsider Jean Boivin, a respected monetary policy researcher who was deputy governor at the bank from 2010 until last month, when he became the Finance Department's representative at G7 and Group of 20 meetings, the job once held by Macklem. As Boivin was part of the Bank of Canada consensus, his appointment would also signal no change.
An outsider floated by Nomura economist Charles St-Arnaud is Don Drummond, a former federal finance official who helped wrestle down Canada's large budget deficit in the 1990s.
Other possibilities are the remaining deputy governors at the Bank of Canada: Agathe Cote, John Murray and Tim Lane -- who of course are under Carney and Macklem in the central bank pecking order.
McMaster economist Scarth noted that Flaherty praised Carney's service in his announcement on Monday morning, and that suggested Carney would not want to appoint somebody who would be likely to cause change.
"We are sort of the envy of the world in financial matters generally. If it ain't broke, don't fix it," Scarth said.