August 31, 2010 / 7:18 PM / 7 years ago

Canada dealers see Sept rate hike, no more in 2010

4 Min Read

TORONTO (Reuters) - Most of Canada's primary securities dealers still think the Bank of Canada will raise interest rates next week, but now forecast the slowing economy will make it the last such move of 2010.

Ten of 12 primary dealers surveyed by Reuters on Tuesday said there's enough momentum in the Canadian economy to justify the central bank raising its key policy rate to 1 percent at the next scheduled rate announcement on September 8.

But the outlook was more pessimistic than polls taken in July and earlier in August, when no Canadian dealer predicted the central bank would pause in September.

Evidence has piled up in recent weeks that North America's economy is stalling, including data on Tuesday that showed Canadian second-quarter growth slowed more sharply than expected.

"It makes sense to get to a nice round number and to distance oneself from the zero bound but for now anyhow the Bank of Canada probably does not have a lot further to go," said Eric Lascelles chief Canada macro strategist at TD Securities.

"The economic data has consistently disappointed, including today, and so the urgency to raise rates is not nearly what it once was. Similarly with some of the global risks out there."

Financial markets are pricing in less than a 50 percent chance of a September 8 hike based on yields on overnight index swaps, according to a Reuters calculation.

Two dealers, CIBC World Markets and National Bank Financial, now call for a pause in September.

"Given that growth and now inflation have each come in materially enough below their previous forecast we see that as giving them the green light to pause and wait for more data, said CIBC chief economist Avery Shenfeld.

"Our expectation is that growth will continue to remain muted enough that they will stay on hold for the rest of the year."

Yanick Desnoyers, economist at National Bank Financial, emphasized that U.S. risks were the biggest threat to Canada's outlook going forward, especially the tepid prospects for U.S. third-quarter growth.

He said uncertainty about tax cuts enacted under former President George W. Bush, set to expire at year end, could also weigh on the growth of Canada's largest trading partner.

"If U.S. households and corporations don't know what's going to happen with their taxes this year, that's not a huge incentive to invest or consume," he said.

"One and Done"?

Seven of the primary dealers forecast a September rate hike will be the last of the year, with the central bank holding steady at its October and December meetings.

The bank raised rates in both June and July, a quarter point each time, but its key policy rate -- the target for the overnight rate -- is still a low 0.75 percent.

Besides Tuesday's GDP data, other soft economic figures in August included tame inflation, an unexpectedly stark monthly jobs loss, cooling in the housing sector, and a ballooning trade deficit.

"It's a close call but we're still leaning toward a hike in September," said Paul Ferley, assistant chief economist at Royal Bank of Canada, adding that today's GDP data raises the probability of central bank staying on the sidelines next week.

Ferley said the next key indicator will be Friday's U.S. payrolls report, given the Bank of Canada has suggested further interest rate hikes would be weighed against both domestic and global economic developments.

($1=$1.06 Canadian)

Additional reporting by Ka Yan Ng; Editing by Jeffrey Hodgson

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