(Reuters) - The Bank of Canada will likely defer an interest rate hike until late next year despite high household debt and above-target inflation, a Reuters poll showed on Wednesday.
The central bank will stay put at next week’s policy decision, according to the poll of 41 economists, leaving its key interest rate on hold until the fourth quarter of 2015, slightly later than forecast in a Reuters poll in October.
Recent comments from BOC Governor Stephen Poloz and his officials on how close to capacity the Canadian economy was operating triggered some of the forecast changes.
“They’ve been arguing that the amount of excess slack in the economy has been understated thus far, and if that’s what they believe, then that would argue for a later tightening,” said Andrew Kelvin, senior fixed-income strategist at TD Securities.
Kelvin also pointed to disappointing growth in the third quarter and to low oil prices.
The latest poll results come alongside wavering expectations that the U.S. Federal Reserve will raise its key interest rate from a record low by the middle of next year and perhaps instead wait until later in the year.
Once the Bank of Canada does start hiking rates, the poll forecast follow-up quarter-point hikes in each of the first two quarters of 2016.
Canada’s headline and core inflation rates overshot the Bank’s 2 percent target in October, at 2.4 percent and 2.3 percent respectively, while unemployment rate dropped to a six-year low of 6.5 percent.
Poloz is expected to continue to sound dovish at next week’s meeting and shrug off inflationary pressures as temporary, the poll found.
TD analysts said Poloz will need to address the jump in inflation, but is likely to place more emphasis on labor market slack.
The central bank dropped its guidance on the direction of interest rates at the last policy meeting in a bid to curb parsing of its policy statements and market volatility.
But that has not resulted in clearer policy, according to the 25 forecasters who answered that question in the Reuters poll. A slim majority said it has led to less clarity instead; none thought there clarity had been improved.
“The result is an increased sense of mixed messages and reversals. Never providing explicit guidance does not necessarily result in less clarity, but offering it and then abandoning generally does,” said Mark Hopkins, senior economist at Moody’s Analytics.
Low interest rates - on hold since 2010 - have helped push Canada’s household debt-to-income ratio to 163.6 percent in the second quarter, close to a record high of 164.1 percent hit last year.
Of 27 analysts who answered a question on this, 21 said that level is too high.
“High household debt will become a burden on the economy in the future when longer-term mortgage rates rise, especially if inflation and growth in household incomes remain low,” said David Madani, Canada economist at Capital Economics.
A separate Reuters poll on the Canadian housing market found that household debt levels are seen as high enough to pose a risk to housing demand and that there is a chance of a major property market correction. [CA/HOMES]
(For other Reuters Poll stories on the outlook for major world central bank policy decisions: [ID:nL3N0TG3BO])
Additional reporting by Randall Palmer; Polling by Anu Bararia and Swati Chaturvedi; Editing by Jeffrey Hodgson, Ross Finley and Chizu Nomiyama