TORONTO (Reuters) - An interest rate increase, not a cut, remains the most likely course of action for the Bank of Canada, the country’s primary securities dealers say, with a hike seen as early as December.
All 10 of the 12 Canadian primary dealers that were available to respond to a Reuters poll said that the central bank will hold its overnight rate at 1 percent until at least December.
Two of the 12 dealers were not immediately available to update their forecasts, and two of the 10 that were said the bank would raise its key rate in December.
The rest said the bank would lift rates in 2012 or even later, delaying its next move largely due to decelerating global economic growth and the U.S. Federal Reserve’s pledge to keep rates low for two years.
The Bank of Canada was the first central bank in the Group of Seven leading industrialized nations to raise rates as the world emerged from recession, increasing its target overnight rate three times in 2010 to its current 1 percent. But it has been biding its time since then as it assesses trends in the world economy.
Dealer forecasts for the overnight rate at the end of 2012 ranged between 1 percent and 2.75 percent, indicating that the dealers expect Canadian rates to diverge further from the steady low rates the Fed has promised.
The Fed pledge, combined with market turmoil, poor economic data, and the debt crises in Europe and the United States, are all responsible for a revision of forecasts by several primary dealers who had previously expected a new cycle of Bank of Canada interest rate increases to start in the second half of this year.
“This is the realization that the global economy will be slower, it’s a realization that second-quarter GDP will be basically negative, and the U.S. economy will surprise on the downside so all those factors suggest that the bank will be very prudent,” said Benjamin Tal, senior economist at CIBC.
Expectations for Canadian interest rates have swung wildly in recent weeks. Just last month market players were bracing for a rate increase in September or October.
Even Bank of Canada Governor Mark Carney, in his first remarks since the recent global turmoil began, backed away on Friday from previous language that had suggested an interest rate hike was coming relatively soon.
“The theme for lower for longer is appropriate given the fact that not only have many downside risks been realized but there are still many that remain,” said David Tulk, chief Canada macro strategist at TD Securities.
Expectations of tighter credit fell sharply as the U.S. debt-ceiling debate and the downgrading of the U.S. credit rating by Standard & Poor’s fueled fears of a recession there, triggering some of the worst stock market selloffs since the collapse of Lehman Brothers in 2008.
Canadian overnight index swaps, which trade based on expectations for the Bank of Canada’s key policy rate, have almost fully priced in the chance of a rate cut this year.
But two of the 12 dealers polled by Reuters still forecast rates will rise this year. “We’re still a believer in the second-half recovery,” said Ryan Bohren, economist at Bank of America Merrill Lynch.
Additional reporting by Claire Sibonney and Trish Nixon; editing by Peter Galloway