Canada seen back on rate-hike path in May

Thu Feb 24, 2011 11:23am EST
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By Jeffrey Hodgson

TORONTO (Reuters) - The Bank of Canada's first interest rate hike of 2011 is widely expected in May as a pickup in the country's resource-rich economy offsets the drag of a strong currency and risk from Libya's revolt and other global events.

The central bank is expected to raise its key rate to 1.25 percent on May 31 from 1 percent after holding it steady at its March 1 and April 12 policy-announcement dates, according to the median forecast of a Reuters poll of economists and strategists released on Thursday.

"There are certainly signs that the U.S. is doing a bit better, so we think Canada is going to get a dividend from that early in 2011," said Peter Buchanan, senior economist at CIBC in Toronto.

"The (central) bank does take a forward-looking view. ... They do think they have to ward off the potential threat of inflation, not one in the next few months mind you, but over the next year or two."

The poll showed all 39 forecasters expect the bank to stand pat on rates at its March 1 policy-setting date, giving a 90 percent median probability that the key policy rate will stay at 1 percent. That is still well above the zero to 0.25 percent target range for the U.S. federal funds rate.

But 24 of 39 forecasters, more than 60 percent, expect Canadian interest rates to rise by the end of the first half.

The results were similar to a recent Reuters poll of Canada's 12 primary securities dealers.

The Bank of Canada, jumping ahead of its Group of Seven peers, began raising rates from a record low 0.25 percent last June. It halted the campaign in September after three increases on concern about the durability of the U.S. economic recovery and debt troubles in Europe.   Continued...

<p>Bank of Canada Governor Mark Carney leaves his office in Ottawa January 19, 2011. REUTERS/Chris Wattie</p>