Canada primary dealers split on next Bank of Canada rate move: poll

Thu Jan 21, 2016 1:29pm EST
 
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By Fergal Smith and Anu Bararia

TORONTO (Reuters) - Canadian primary dealers were split on the direction of the next interest rate move by the Bank of Canada, according to a Reuters poll published on Thursday, after the central bank surprised many traders by deciding not to cut a day earlier.

The Bank of Canada left its benchmark interest rate on hold at 0.50 percent on Wednesday, but admitted it was not an easy call, as concern about a rapid decline in the currency clashed with an economic slump.

Many forecasters had thought the central bank would cut rates further to combat a deep oil price shock and a widening in credit spreads amid financial market turmoil at the start of 2016. The decision followed two 25 basis point cuts in 2015 as the economy contracted in each of the first two quarters.

But others wondered how much difference it would make.

"The impact of a cut diminishes as the overnight rate gets lower," said Andrew Kelvin, senior rates strategist at TD Securities.

Five of Canada's eleven primary dealers expect a rate cut, with four projecting the central bank will move in 2016 and one expecting it to hold off until 2017. Meanwhile, five expect the next rate move to be a hike. One has the central bank on hold throughout its forecast horizon.

The Bank of Canada has yet to incorporate expected fiscal stimulus into its projections. That suggests to some dealers that the central bank will wait until the federal budget is tabled before any move on rates, keeping the central bank sidelined in March.

"I would expect them to keep the powder dry in the event that things really sharply deteriorate," said Derek Holt, an economist at Scotiabank.   Continued...