February 26, 2015 / 3:38 PM / in 3 years

Bank of Canada to hold fire on interest rates next week: Reuters poll

OTTAWA/BENGALURU (Reuters) - The Bank of Canada will likely hold interest rates steady next week as it waits to see how last month’s surprise cut is absorbed by the economy, though analysts expect the central bank to lower rates once more by mid-year, a Reuters poll found.

Bank of Canada Governor Stephen Poloz (R) speaks during a news conference with Senior Deputy Governor Carolyn Wilkins upon the release of the Monetary Policy Report in Ottawa January 21, 2015. REUTERS/Chris Wattie

Comments from Governor Stephen Poloz earlier this week proved crucial to cementing analysts’ forecasts.

Markets had been increasingly pricing in the likelihood of another 25 basis point cut, but those bets were dramatically reduced after Poloz said on Tuesday that the bank took out the right amount of “insurance” when it cut rates in January.

That cut was taken to guard against the downside risks to inflation and growth as the effect of the cheap price of oil, a major export, is felt in the economy. Oil prices have since stabilized near the bank’s assumed price, Poloz noted.

The median forecast of 42 analysts found the bank will keep rates at 0.75 percent when it makes its policy announcement on March 4. Nearly one out of every four economists who had been anticipating a rate cut changed their forecast following Poloz’s remarks.

“I don’t think Poloz has run out of ammunition. I think that he realized that there is no point in wasting ammunition,” said John Clinkard, chief economist at Deutsche Bank Canada.

“For the time being, he is on the sidelines.”

Analysts expect the Bank of Canada will make use of that ammunition before long, with a cut to 0.5 percent seen in the second quarter. That would be the lowest level since June 2010, when the bank started raising rates as the country recovered from the impact of the global credit crisis.

From there, the bank will hold its fire until it resumes rate hikes in the first quarter of next year, reaching 1 percent in the third quarter of 2016, according to the poll.

As economists scrambled to adjust their forecasts, some took issue with being caught off guard by the bank for the second time in two months. The bank stopped using forward guidance late last year, saying markets should take their cue from the data.

“The lack of forward guidance has increased uncertainty in the markets, breeding unnecessary volatility and a larger risk that expectations are mispriced,” said Mazen Issa, senior Canada macro strategist at TD Securities.

Moreover with the household debt-to-income ratio at a record high, fueled by a housing boom, 18 out of 30 analysts said they were concerned that the central bank’s current shift toward more stimulus could aggravate that.

But a separate Reuters poll showed that overly indebted households should not prevent the central bank from cutting rates further.

“We see no sign of housing being inflated yet, but it bears watching, particularly in the big cities,” said David Sloan at 4Cast.

Polling by Anu Bararia; Editing by Ross Finley and Jeffrey Benkoe

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