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OTTAWA (Reuters) - The Bank of Canada is unlikely to raise interest rates until the third quarter of 2015, possibly later than the U.S. central bank, and will stick to a staunchly neutral stance in its policy statement next week, a Reuters poll of analysts showed on Wednesday.
The Canadian central bank may forecast a slightly higher profile for inflation in its quarterly Monetary Policy Report (MPR) on April 16, and it may sound upbeat about the positive effects on Canada of a strengthening U.S. economy.
But it won't feel confident enough to let down its guard on the threat of disinflation, let alone signal any shift in bias towards eventually raising rates, analysts who participated in the poll said.
None of the 36 analysts surveyed expected an interest rate move next week. Only two predicted a hike by the end of this year.
The median forecast in the poll was for the bank to raise the overnight target rate by 25 basis points to 1.25 percent at either its July or September 2015 announcement dates. That is unchanged from a previous Reuters poll published on February 27.
With policy moves a long way off, markets will watch for any changes to the bank's quarterly projections, or, in particular, in its tone on inflation, as well as its views on gross domestic product growth in Canada and the United States.
"If anything, I think the focus will be on the inflation narrative," said Mazen Issa, senior strategist at TD Securities in Toronto. "We know that growth is going to be a little bit wonky in the near term and they'll look through that, and so should the market and everyone else."
The inflation rate has been below the bank's 2 percent target for nearly two years. The risk of disinflation is the main reason Governor Stephen Poloz shifted the bank's stance into neutral last October after 18 months of signaling rate hikes were on the horizon.
In its March policy statement, the bank said that "the downside risks to inflation remain important" and Poloz later said in a news conference he could not rule out a rate cut.
Whether or not that language is repeated in the MPR or by Poloz at next week's news conference could move the market.
The Bank of Canada was the first in the Group of Seven rich nations to raise its policy rate in 2010 following the global financial crisis. But it has held the rate steady at 1.0 percent since then.
Market speculation of easier monetary policy has faded in recent weeks after a string of relatively upbeat figures point to more momentum in the economy after a slow start to the year.
Indeed, it would take a severe shock for Poloz to actually lower rates, not just more sluggishness, argued Mark Hopkins, economist at Moody's Analytics.
"Despite the Bank of Canada's apparent newfound agnosticism over the direction of its next rate hike, it seems unlikely that the bank would reverse course from its longstanding policy of holding rates at 1 percent in order to lower the overnight rate in the absence of a clear justification," he said.
Traders continue to price in a small chance of a rate cut later this year, but the bets on that outcome are smaller than they were a few weeks ago. BOCWATCH
The Reuters poll showed an 88 percent probability that the bank's next move would be to tighten monetary policy. None of the economists actually forecast a rate cut, but several put the chances at between five and 25 percent.
One reason Poloz might hesitate to lower borrowing costs is the near record high household debt-to-income ratio in Canada and lingering concerns about a heated housing market.
"I don't think the household sector has gone through enough of introspection or navel-gazing to give the Bank of Canada the flexibility to cut rates," said David Watt, chief economist at HSBC Bank Canada.
And if rate hikes are the most likely scenario, the question becomes whether Canada will move before or after the U.S. Federal Reserve.
Fed Chair Janet Yellen briefly roiled markets last month when she suggested the Fed may start raising rates around six months after in bond-buying program ends, suggesting as early as next spring. More Wall Street economists now believe the Fed will raise interest rates in the first half of 2015, a survey showed last week.
"Rising inflation will position Canada to roughly match the U.S. in the timing of the next rate hike," said Avery Shenfeld, chief economist at CIBC World Markets. "But given that we are still more than a year away, the timing of that move is still subject to considerable uncertainty."
Polling by Ishaan Gera; Additional reporting by Deepti Govind; Editing by Peter Galloway