December 1, 2016 / 2:32 PM / a year ago

Bank of Canada to stay on sidelines until 2018: Reuters poll

(Reuters) - The Bank of Canada will maintain its wait-and-see stance for more than a year, a Reuters poll found, even as the specter of lackluster export growth becomes more entrenched following Donald Trump’s U.S. presidential election win.

A sign framed by maple leaves is pictured in front of the Bank of Canada building in Ottawa July 17, 2012. REUTERS/Chris Wattie

All but one of the 40 economists polled this week in the first full Reuters BoC survey since the election said the bank would hold rates at 0.50 percent at its next policy review on Dec. 7, as it gauges the impact of Trump’s campaign promises.

Trump has vowed to renegotiate the North American Free Trade Agreement and economists said that, coupled with the lack of clarity on the effects of tighter mortgage laws and government’s infrastructure spending, will ensure the bank holds rates.

The consensus view in the latest poll was that rates will stay put until the first quarter of 2018, when the BoC will hike them to 0.75 percent. Forecasts have oscillated between the first and second quarters for several polls now.

“It is a bit premature to suggest that the Bank of Canada’s inclination to raise rates has changed materially at this juncture,” said Nick Exarhos, an economist at CIBC Capital Markets, noting that fourth-quarter growth is expected to slow.

He added that the ensuing trade uncertainty given Trump’s protectionist views will likely dampen investment, possibly growth and may eventually prompt the BoC to cut rates.

The price of oil LCOc1, a key Canadian export, remains depressed compared with levels a few years ago, even though OPEC’s decision on Wednesday to cut output for the first time since 2008 gave it a big boost.

When asked what posed the biggest risk to the economy next year, a little less than half of the 24 poll respondents picked weak export growth, while one-quarter said a housing market correction was the top threat in 2017.

For some time now, BoC Governor Stephen Poloz has looked to non-energy exports to lead the economic rebound but they have been disappointing despite a drop of more than 25 percent in the Canadian dollar since mid-2014.

The central bank tried to support the economy by cutting rates twice in 2015 to curtail the negative impact of the oil price crash but Canada fell into a brief recession nonetheless.

As the economy regained some momentum, oil production was disrupted by wildfires in northern Alberta earlier this year, causing growth to contract in the second quarter at the steepest rate since the global financial crisis.

The future of Canadian exports and economic growth looks uncertain with President-elect Trump espousing a hawkish position on global trade, especially since the U.S. economy picks up about 75 percent of Canada’s exports.

“I don’t see a lot of momentum in the domestic economy, looking at exports and business investment. I am still concerned about the performance of the economy,” said HSBC Canada Chief Economist David Watt, who expects a 25-basis-point rate cut in January.

Still, a few noted that once the U.S. Federal Reserve resumes raising rates, most likely this month, it could further depress the loonie and take some pressure off the BoC to act.

A separate Reuters poll showed the Canadian dollar will depreciate further against its U.S. counterpart over the coming months as expected monetary policy divergence eclipse higher prices for oil. [CAD/POLL]

Near record-low rates have already sent household borrowing to unprecedented levels. The debt-to-income ratio hit 167.6 percent in the second quarter, stoking fears of a correction in the housing market, where most of the borrowing has taken place.

Still, analysts gave a median 25 percent probability the next move would be a rate cut, with three saying it would come in 2017 and only one predicting it would happen next week.

They put the odds at 13 percent that Trump’s presidency would eventually cause the BoC to cut rates over the next six months.

“We still need potentially more fiscal and more monetary policy support going forward,” Watt said. “Trump’s policy agenda is not going to be a net positive for Canada.”

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

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