July 20, 2010 / 5:41 PM / 7 years ago

All Canada dealers see Sept rate hike, Q4 cloudy

4 Min Read

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".

The central bank also said it now sees the economy returning to full capacity by the end of 2011, two quarters later than it estimated in its April Monetary Policy Report.

"The key thing is the pushing back of the closing of the output gap. They've got now another six months to bring rates back to where they should be," said Michael Gregory, senior economist at BMO Capital Markets.

"They got a little bit more wiggle room. They can skip periodically and that's reflected in what the market is thinking now."

Three dealers said the central bank would halt rate rises after September for the rest of the year, while four dealers said rates would be lifted by 25 basis point increments at each of the three scheduled policy announcements left this year.

"There was a lack of conviction clearly in this (Bank of Canada) press release and the door is open. We still think that domestic developments should be strong enough going forward to warrant an increase of 25 basis points at each upcoming meeting. The real rate is still pretty low," said Yanick Desnoyers, an economist at National Bank Financial.

"They don't want to give any guidance to the market. I suspect that this will probably be the longest lag in history between an increase in rates in Canada and no policy response in the U.S."

Year-end forecasts for the Bank of Canada overnight rate ranged from 1.00 percent to 1.50 percent.

($1=$1.05 Canadian)

Reporting by Ka Yan Ng and Claire Sibonney; editing by Peter Galloway

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