May 19, 2016 / 4:08 PM / 3 years ago

Bank of Canada may sound dovish in May statement, hike seen next year: Reuters poll

OTTAWA/BENGALURU (Reuters) - The Bank of Canada is expected to strike a more dovish tone in its May policy statement, partly due to a still-raging wildfire in Alberta that has disrupted oil production, but a Reuters poll suggests it will not cut interest rates again.

Pedestrians are reflected in a window while walking past the Bank of Canada office in Ottawa March 4, 2015. REUTERS/Chris Wattie

The survey of more than 40 economists this week showed the central bank will probably not move to adjust rates again until the third quarter of next year, when it is expected to raise rates by 25 basis points to 0.75 percent.

The economists’ responses suggested a greater likelihood that the bank’s next move will be a hike, about a three-in-four chance, compared with a one-in-five chance of another rate cut.

The central bank is almost unanimously expected to leave rates unchanged when it makes its policy announcement on May 25, with most of those polled arguing a rate cut was not the right remedy for a likely temporary setback for the economy.

Only one contributor forecast a rate cut next week. Even the number of people expecting a rate cut some time this year fell from a month earlier.

Wildfires have closed in on Fort McMurray in Alberta, a major oil-producing province which has already been severely hit by the oil price shock of 2014. The inferno has forced the mass evacuation of people and triggered the shutdown of key oil sands production facilities.

“It is appropriate for the Bank of Canada to simply acknowledge the wildfires’ impact on the economy,” said Sebastien Lavoie, assistant chief economist at Laurentian Bank Securities.

“But monetary policy is a blunt and ineffective instrument for factors putting a temporary dent into economic activity.”

Respondents were nearly evenly divided over what impact the wildfire would have on the central bank’s policy stance, with 14 saying it would make them a bit more accommodative and 12 saying it would not.

“It will make the Bank of Canada more dovish over the short-run as it awaits the short-run negative impact on GDP to reverse, but it is not expected to become more dovish over the long run,” said James Blumenthal, chief Canada market analyst at Informa Global Markets.

Last year, the central bank cut interest rates twice to combat a mild recession as the oil-exporting country was hit by a collapse in the price of crude.

As the wildfires in Alberta continue and prolong the shutdown of oil facilities, economists have begun modestly trimming their growth forecasts for this year.

However, they expect a recovery later in the year.

“The Bank will probably view the wildfire as temporary unless problems persist and expand outside of energy,” said Arlene Kish, an economist at IHS Economics.

Polling by Anu Bararia; Editing by Bernadette Baum

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