Canada to keep interest rates on hold until 2017: Reuters poll

Thu Sep 3, 2015 1:40pm EDT
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By Leah Schnurr and Anu Bararia

(Reuters) - The latest round of policy easing in Canada is probably over but interest rates are expected to stay low for longer as the central bank tries to lift the economy out of a mild recession, a Reuters poll of economists found.

An economic slowdown brought on as falling oil prices dragged down business investment and the energy sector have prompted two 25 basis point Bank of Canada rate cuts this year.

Although analysts see a sizeable 40 percent possibility the Bank will cut again at some point despite rates sitting at only 0.5 percent, they peg the chance of a hike at 55 percent, though it won't come for a year and a half.

While the median forecast from 40 economists suggests no change in rates on Sept. 9, forecasters pegged the probability of another 25 basis point cut at one-in-four, particularly after the bank's first rate cut this year in January was unexpected.

Markets are also pricing in a small risk of more easing next week.

"The Bank of Canada will be comfortable remaining on the sidelines," said David Tulk, chief Canada macro strategist at TD Securities. "There is still a risk they might cut given that the outlook has weakened. But they don't have the same urgency to respond to a weaker-than-expected performance in the economy like they did back in July," said Tulk.

Even if the Bank did cut rates again, recent experience from other central banks shows that trimming a rate already close to zero does not wield much potency as a policy tool.

Cutting rates again might also make it easier for Canada's already heavily indebted households to borrow. The household debt-to-income ratio is near a record high, with much of that borrowing being channeled into the country's housing market.   Continued...

The Bank of Canada building is pictured in Ottawa July 19, 2011. REUTERS/Chris Wattie