Canada dealers see Sept rate hike, no more in 2010

Tue Aug 31, 2010 3:15pm EDT
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By Claire Sibonney and Jennifer Kwan

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.   Continued...