May 23, 2013 / 4:28 PM / 4 years ago

Bank of Canada rate hike view pushed to last quarter of 2014

5 Min Read

TORONTO (Reuters) - The Bank of Canada's next interest rate hike won't come until the fourth quarter of 2014, according to a Reuters survey that saw economists push back forecasts for the next tightening due to the economy's tepid growth and low inflation.

All 34 economists polled by Reuters expect the central bank to leave its benchmark rate unchanged at 1 percent on May 29, when it announces its next scheduled rate decision.

"The bank certainly has sent a strong message that they're comfortable with the level of monetary accommodation in the near term," said Derek Burleton, deputy chief economist at Toronto-Dominion Bank, whose rate hike forecast falls on the median fourth quarter of next year.

"Our forecast incorporates some of the bank's medium term view, but keeps the rates stable in the short term, which is consistent with an economy that's struggling to advance."

Canada's inflation rate in April fell to its lowest level since October 2009, making any upward interest rate move even less likely.

Unlike other major central banks that have used ultra-easy monetary policies to stimulate their lackluster economies, Canada's central bank has left interest rates untouched for the longest period since the early 1950s, following three successive hikes in 2010.

Last year, the Bank of Canada said it plans to raise borrowing costs eventually, making it the only Group of Seven central bank with an explicit tightening bias.

It has since toned down the hawkish language, however, as the economy sputtered at the end of last year.

Economists say Canada started this year stronger than it ended 2012, growing faster than expected, but more recent data also showed some of that growth was due to one-time factors.

"We don't see the economy continuing to accelerate. If anything we see a bit of a pull back in Q2, so very much an economy that's growing modestly at best," said Burleton.

The latest Reuters poll has the median forecast for the next quarter-point rate hike pushed to the fourth quarter of 2014 from an April poll which had pegged the next hike to occur during the third quarter of 2014.

Canada's 12 primary dealers, the institutions that work directly with the Bank of Canada as it carries out its monetary policy, backed this view in the latest poll and said the Bank of Canada's incoming governor Stephen Poloz is expected to retain the tightening bias.

Current governor Mark Carney will be taking over as head of the Bank of England on July 1.

Mixed Data

This week, retail sales showed that Canadians bought more items in March, even though the value was unchanged from February, indicating the economy was more robust than expected in the first quarter.

Canada's latest employment data for April showed the unemployment rate held steady at 7.2 percent, with a modest 12,500 new jobs added in April following some 54,500 jobs estimated to have been lost in March.

On the housing front, the number of housing starts slipped in April from March, the latest sign Canada's housing market is cooling.

"A soft landing seems to be unfolding, which doesn't subtract too much from growth," said Michael Gregory, senior economist at BMO Capital Markets.

"Government restraint continues, but not to the point where it's taking away too much from growth and consumers are continuing to spend a little bit but not by very much."

BMO sees the Bank of Canada raising its benchmark interest rate in the third quarter of 2014.

The Bank of Canada is also in no hurry to raise borrowing costs too far ahead of the U.S. Federal Reserve, where rates have been slashed effectively to zero, with no sign of a hike until at least 2015.

"It's no longer obvious that the next Bank of Canada rate hike will come any earlier than the first upward move by the U.S. Fed," said Avery Shenfeld, chief economist at Scotiabank, which is calling for the first Canadian hike to come in the first quarter of 2015.

The Federal Reserve's monetary stimulus is helping the U.S. economy recover but the central bank needs to see further signs of traction before taking its foot off the gas pedal, Fed Chairman Ben Bernanke said on Wednesday.

Polling and additional reporting by Deepti Govind; Editing by Jeffrey Hodgson and Nick Zieminski

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