Former Bank of Canada head says rate hikes likely a long way off

Wed Dec 2, 2015 4:45pm EST
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By Fergal Smith

TORONTO Dec 2 (Reuters) - A former head of the Bank of Canada said on Wednesday he thinks the central bank will not raise interest rates until the U.S. Federal Reserve has tightened several times, which will be a drag on the Canadian currency.

David Dodge, who headed the Canadian central bank from 2001 to 2008, said he expects the Bank of Canada to be hesitant to tighten until the Fed's benchmark rate - which has been in a 0 to 0.25 percent range since 2008 - "moves at least half a point above the policy rate here in Canada."

The Bank of Canada on Wednesday held its main policy rate at 0.50 percent and said in a statement that "policy divergence is expected to remain a prominent theme."

By contrast, Federal Reserve Chair Janet Yellen said on Wednesday she was "looking forward" to a U.S. interest rate hike that will be seen as a testament to the economy's recovery. Some market players are forecasting a U.S. hike this month.

Dodge said at a presentation in Toronto that he expected the Canadian dollar to move in the range of 73 to 77 U.S. cents in 2016 and 2017. The currency was trading on Wednesday at 74.92 U.S. cents or C$1.3348 to the U.S. dollar.

He said his currency forecast was based on U.S. crude oil prices trading in a range of $45 to $55 in 2016 and $55 to $60 in 2017.

The former central banker said a more stable oil price should halt the recent fall of inbound investment, taking some of the pressure off the Canadian dollar. (Editing by Jeffrey Hodgson and Sandra Maler)