April 7, 2016 / 2:02 PM / in a year

First Bank of Canada rate hike draws closer on fiscal stimulus: Reuters poll

A woman walks past the Bank of Canada office in Ottawa, Canada July 16, 2015.Chris Wattie

BENGALURU/OTTAWA (Reuters) - The Canadian economy's strong start to the year allied with fiscal stimulus from the country's new Liberal government will allow the Bank of Canada to start raising interest rates sooner in 2017 than had been previously expected, a Reuters poll found.

Economists unanimously expect the central bank to keep rates at 0.5 percent at its meeting on April 13, but think it will likely revise its economic forecasts higher for this year.

Bank officials have said they will factor into their new projections the expected impact from the C$29.4 billion ($22.4 billion) in deficit spending unveiled by the government last month for this year.

A series of stronger-than-expected economic data this year has driven some to believe the economy may already be outpacing the bank's forecast of 1 percent growth in the first quarter, despite the latest disappointing trade numbers.

This brought the possibility of a rate hike closer by a quarter, with the majority of more than 40 economists polled by Reuters forecasting the bank would raise rates in the third quarter of 2017 versus the fourth quarter in a poll taken in March.

"Recent stronger growth reduces the chance of a rate cut," said Benjamin Reitzes, senior economist at BMO Capital Markets.

Still, at 7.3 percent, the unemployment rate is too high for the bank to raise rates, said Reitzes, who sees the first rate hike occurring in the third quarter of next year.

After raising rates for the first time in nearly a decade in December, even the U.S. Federal Reserve is going slow on its path of policy normalization.

Bank of Canada Governor Stephen Poloz's growth outlook is based on a non-energy export-led revival helped by stronger U.S. demand and a weaker domestic currency after the price of oil, a major Canadian export, collapsed.

Oil has lost more than half of its value since mid-2014, sending the Canadian dollar to a 12-year low earlier this year. The currency's quick drop was partly responsible for the central bank deciding not to cut rates further in January as it waited to see what shape the promised fiscal policy would take.

The central bank cut rates twice last year to cushion the economy from the negative impact of the oil price shock, which sent Canada into a mild recession in the first half of 2015.

A little less than a fifth of economists still forecast the bank will have to cut rates again sometime this year.

"It is premature to contemplate a hawkish stance from the Bank of Canada since the medium-term global and domestic outlook remains far from rosy," said Sebastien Lavoie, assistant chief economist at Laurentian Bank, taking the same view as many policymakers on the U.S. Federal Open Market Committee.

But years of low borrowing costs sent the household debt-to-income ratio to a record high of 165.4 percent in the fourth quarter, reinforcing fears Canadians have taken on too much debt, particularly in the housing market where much of it is parked.

"Canada's economy remains highly leveraged once we combine the corporate, household and total government debt," said Lavoie. "It remains to be seen if the tax relief offered to low and mid-income households in the federal budget will allow them to start deleveraging."

Polling by Anu Bararia and Sarmista Sen; Editing by Ross Finley and Bill Rigby

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