All Canada dealers see Sept rate hike, Q4 cloudy

Tue Jul 20, 2010 1:45pm EDT
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By Ka Yan Ng and Claire Sibonney

OTTAWA/TORONTO (Reuters) - Canada's primary securities dealers forecast unanimously on Tuesday that the Bank of Canada will raise interest rates for a third time this year in September, but most expect a pause in the credit tightening cycle sometime in the fourth quarter.

All 12 of Canada's primary dealers, surveyed by Reuters, said Canada's central bank will raise rates at its next scheduled policy announcement date on September 8, unchanged from a similar poll last week.

The survey was conducted after the Bank of Canada raised its key rate by 25 basis points on Tuesday and warned that economic recovery at home and abroad will be slower than it had previously forecast, suggesting any further hikes may be gradual.

Markets were less sure than the dealers that the bank will raise rates again in September. Yields on overnight index swaps, which trade based on expectations for the central bank's key policy rate, suggest about a 37 percent chance of a rate hike on September 8.

"I think markets are a little lost in the sense that there are other concerns," said Carlos Leitao, chief economist at Laurentian Bank Securities.

"To me, the bank is not much different today than it was in June so therefore they'll keep highlighting the risks and whatnot but they'll keep going."

Most dealers -- the institutions that deal directly with the central bank to help it carry out monetary policy -- left their October and December predictions unchanged from the poll published on July 14.

Fears of a double-dip recession, Europe's debt troubles and patchy U.S. economic data have weighed on markets in recent months, and the central bank on Tuesday said the global recovery "is proceeding but is not yet self-sustaining".   Continued...