July 8, 2015 / 5:24 PM / 2 years ago

Canada rates seen on hold, but more economists expect cut: Reuters Poll

BENGALURU/OTTAWA (Reuters) - A series of weak economic data that suggests Canada may already be in recession has prompted a growing minority of economists to predict the central bank may cut interest rates again, possibly as soon as next week, a Reuters poll has found.

The Bank of Canada shocked markets in January with a 25 basis point rate cut that it called “insurance” against the impact of a steep drop in the price of oil, a major export.

So far, most forecasters continue to say that will be all, with the next move a 25-basis-point rate hike in late 2016. But there is a strong possibility that the bank’s next move will be to lower rates, with 12 of 35 economists surveyed predicting the bank will announce a 25-basis-point cut in the benchmark rate to 0.5 percent in its policy statement next week.

In the previous Reuters poll in May only five economists forecast a rate cut at either of the bank’s two policy statements in the current quarter. The next one is in September.

“The lower starting point (for second quarter growth) will probably prompt them to ease monetary policy once again,” said Nick Exarhos, economist at CIBC, who expects a cut on July 15.

“They will want to insulate the economy a little bit more.”

The bank has maintained the view that the worst hit to the economy would be front-loaded in the first quarter, with growth then regaining momentum from growing U.S. demand for non-energy exports.

But second-quarter figures so far do not look encouraging, with a contraction in gross domestic product in April and exports dropping in May. Analysts put a median 50 percent probability that the economy shrank during the three-month period just ended.

If realized, that would put the economy in recession for the first time since the 2008-09 financial crisis.

Eight of the economists surveyed changed their rate forecast to a cut next week where they had previously expected policy to be on hold.

Respondents were also nearly evenly divided on whether the economy can bounce back in the second half as strongly as the central bank expects, with 14 saying it will not and 11 saying it will.

Further rate cuts could raise worries of cheaper credit driving a spike in debt burdens, especially with Canada’s household debt-to-income ratio near record highs.

John Clinkard, chief economist at Deutsche Bank, said lower rates could also add fuel to the housing market, which is already running at fairly high temperatures.

Sixteen economists in the poll said there was at least a “significant” risk that lowering rates would further inflate the housing market, while seven deemed the risk “insignificant”.

After January’s rate cut, economists initially predicted another reduction could follow, but those expectations faded as the price of oil stabilized and then shot higher. Oil prices have since fallen back toward $50 a barrel.

“The oil price shock is larger and the non-energy economy isn’t growing as fast as the bank assumes,” said David Madani at Capital Economics, who expects rates at 0.25 percent by October.

Polling and analysis by Anu Bararia; Editing by Ross Finley and; Peter Galloway

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