Bank of Canada not seen tightening until fourth-quarter 2013

Thu Oct 18, 2012 2:47pm EDT
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By Louise Egan

OTTAWA (Reuters) - The Bank of Canada will postpone interest rate hikes until the fourth quarter of next year and will likely water down rather than eliminate its hawkish language when it announces its next rate decision on October 23, a Reuters poll of market forecasters showed on Thursday.

In defiance of the global trend of easier monetary policy, Canada's central bank has signaled since April that it is looking at raising borrowing costs. But market expectations on the timing of such a move have been pushed back repeatedly by the sputtering global economy.

The Reuters poll of the 42 forecasters showed none expect a change on Tuesday in the central bank's main policy rate, now at 1 percent. The median prediction is for a first quarter-point rate increase in the fourth quarter of 2013, two quarters later than was forecast in an August 28 poll.

"There's a feeling that there's not a lot of flexibility here," said Mark Hopkins, senior economist at Moody's Analytics.

"The fourth quarter for rate hikes is splitting the difference between when they would probably want to start raising rates given economic conditions and the constraint that they can't get too far ahead of the Fed," he said.

Canada's 12 primary dealers, the banks that deal directly with the central bank as it carries out monetary policy, also forecast a fourth-quarter 2013 hike, the poll showed.

Central bank Governor Mark Carney is in a difficult spot. Rate hikes would go a long way to solving the headache of soaring household debt and a hot housing market.

But if he moves too far in advance of the U.S. Federal Reserve, he risks driving up an already strong Canadian dollar, which would hurt the export-reliant economy.   Continued...