Canadian dealers expect next rate hike in third quarter of 2013

Fri Mar 23, 2012 4:54pm EDT
 
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Claire Sibonney

TORONTO (Reuters) - Most of Canada's primary dealers still expect the Bank of Canada to keep interest rates steady until the third quarter of 2013 as global growth remains subdued, but diminishing European risks and constructive U.S. economic data have increased the chance of a rate hike sooner rather than later.

In a Reuters poll conducted on Friday, the median forecast for the Bank of Canada's main policy rate was for 1 percent at the end of this year and 1.50 percent at the end of 2013.

The median forecasts were unchanged from the previous primary dealer poll on February 17. No dealer expects lower rates this year now that Bank of America Merrill Lynch moved its Canadian forecasting operations to New York and withdrew a call for a 75-basis point cut in 2012. The bank is reviewing its forecasts.

Seven of Canada's 12 primary dealers, the institutions that deal directly with the central bank as it carries out monetary policy, believe it will resume raising rates next year. Only one expects the next increase to come this year.

Recent action by the European Central Bank to ease Europe's debt crisis, evidence that stronger U.S. data "is not just a one-hit wonder" and excessive indebtedness by Canadian households are the key reasons the Bank of Canada is likely starting to think about withdrawing monetary stimulus, said Carlos Leitao, chief economist at Laurentian Bank of Canada in Montreal.

"You can put all kinds of restrictions and all kinds of measures on the credit side, but there's nothing like an interest rate hike, or the likelihood of an interest rate hike, to slow indebtedness," said Leitao.

PRIMARY DEALER NEXT MOVE HOW MUCH END 2012 END 2013 BofA-MERRILL LYNCH N/A N/A N/A N/A

BMO CAPITAL MARKETS JULY 2013 25 BPS 1.00 PCT 1.50 PCT   Continued...