March 3, 2016 / 2:22 PM / 2 years ago

Poll: Bank of Canada to keep rates on hold, await fiscal stimulus push

Bank of Canada Governor Stephen Poloz speaks during a news conference in Ottawa, Canada, January 20, 2016. REUTERS/Chris Wattie

(Reuters) - The Bank of Canada will likely keep interest rates on hold next week as the prospect of larger fiscal stimulus from Ottawa later this month reduces pressure on it to cut, a Reuters poll of economists found.

The central bank chopped rates twice in 2015 to 0.50 percent to cushion a reeling economy from the negative impact of a crash in the price of oil, a major Canadian export, which triggered a brief recession in the first half of the year.

With oil prices still broadly depressed and dragging on growth, the Bank of Canada is not expected to raise rates until the end of 2017, the poll of 42 analysts taken this week found. Rates are seen rising to 0.75 percent by the fourth quarter of 2017.

The BoC is likely to wait until Prime Minister Justin Trudeau’s first budget is announced on March 22 before charting a course of action, economists said.

“Domestic conditions have not deteriorated further, and with the federal budget coming in a few weeks, the Bank of Canada will take a pause this time,” said Jean Paul Lam, professor of economics at the University of Waterloo.

Trudeau’s Liberal Party has promised to boost economic growth through infrastructure spending and is likely to announce a larger deficit than initially anticipated.

A minority of economists in the poll said even that may not bring about a material turnaround in Canada’s fortunes until next year and further monetary easing is warranted, perhaps as early as April.

“Some form of monetary easing will likely be necessary at some point,” said Sebastien Lavoie, assistant chief economist at Laurentian Bank.

The economy lost momentum in the fourth quarter of last year, expanding at an annualized 0.8 percent, which was a surprise since market expectations were for no growth at all. The result also topped the Bank of Canada’s forecast.

Its steady stance stands in contrast to the U.S. Federal Reserve, which is expected to tighten policy further this year after raising rates for the first time in nearly a decade in December. Action is not seen likely at its March policy meeting.

“VERY ELEVATED HOUSEHOLD DEBT”

The main challenge with more monetary stimulus is that it could aggravate already very high household debt with more cheap borrowing, according to economists in the poll.

Just as the economy crawled out of a recession in the third quarter, Canada’s debt-to-income ratio peaked at 163.7 percent, egged on by cheap loans.

Most households borrowed money to invest in the property market, which many experts have warned could be in store for a crash, particularly in the urban areas of Toronto and Vancouver. [CA/HOMES]

“A rate cut coupled with the expectation that rates will remain low even for a longer period might exacerbate the already very elevated household debt levels,” said Lam.

Last year’s rate reductions, along with the unremitting fall in oil prices, pushed the Canadian dollar to a 12-year low of C$1.4689 in January and contributed to the bank’s decision to keep rates unchanged at its last meeting.

The loonie has recovered some and the latest poll of foreign exchange strategists suggests it won’t revisit those lows again this year. [CAD/POLL]

“The Fed has backpedaled from its promise of four rate hikes this year and this has helped the Canadian dollar a lot,” said Thomas Costerg, senior economist at Standard Chartered Bank.

(For stories from the Reuters global FX poll:)

Polling by Anu Bararia in Bangaluru; Editing by Ross Finley and Jeffrey Benkoe

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