March 1, 2019 / 1:11 PM / 7 months ago

Bank of Canada to hike once this year; small chance of cut

BENGALURU (Reuters) - The Bank of Canada may be closer to a policy turning point, as it is still set to hike its key interest rate once more later this year but there is now a small chance of a cut, according to economists polled by Reuters.

A jogger runs past the Bank of Canada building in Ottawa, Ontario, Canada, July 11, 2018. REUTERS/Chris Wattie

Although the BoC still aims to take the overnight rate, currently at 1.75 percent, up closer to what it says is the neutral range, the latest Reuters poll showed that it will not reach the lower end anytime soon.

“There is absolutely no evidence that the economy is trending faster than potential with rates below 2 percent,” said Avery Shenfeld, chief economist at CIBC.

“So, it seems a stretch to suggest that it will continue to grow at something close to potential with rates anywhere near the 2.5 to 3.5 percent range.”

The latest Reuters poll of 35 economists taken Feb 22-28 showed the central bank will pause until the third quarter of this year before hiking rates to 2.0 percent, as the global economy slows and financial conditions tighten.

Economists expect one more hike next year, taking the overnight rate to 2.25 percent by end-June 2020. But then rates are due to fall in the fourth quarter of next year, according a smaller of sample of forecasters willing to look that far out.

Just one month back, the same set of economists predicted at least two hikes this year. That view changed after BoC Governor Stephen Poloz said in a Feb 21 speech the rate path was “highly uncertain” and the bank will remain “decidedly data-dependent”.

Canada’s economic growth slowed sharply to just 0.4 percent on an annualized basis in the fourth quarter of last year, much weaker than the 1.2 percent forecast, according to data released after the Reuters poll was published.

Most major economies around the world are also slowing, global trade volumes are flagging and the U.S. and China remain locked in a trade war.

Inflation, which the BoC aims to keep at 2 percent, is currently hovering at 1.4 percent and shows little sign of a sudden upturn.

Many analysts say for those reasons, the BoC should be careful about considering another rate rise in coming months.

“It is too early to judge whether a mid-year hike would be a mistake, but the risks are clearly tilted to the downside at present and inflationary pressures are contained, so there is little reason to move monetary policy ahead of confirmation of a recovery in growth both here and globally,” said Brian DePratto, senior economist at TD.

Asked whether another BoC rate rise by mid-year would be a mistake, poll respondents were evenly split.

In the meantime, the chances of a rate cut are small, but not insignificant. The median probability was 15 percent in the latest Reuters poll, with forecasts ranging from 0 to 50 percent.

“This (BoC) governor seems convinced that rates, where they are, are still stimulative, and so the hurdle the economy will have to pass on the downside to justify a rate cut would be fairly high,” said CIBC’s Shenfeld, who put the probability at 15 percent.

“So, we still think that the economy will muddle along with rates at current levels and therefore the BOC will be reluctant to cut rates...this year - it’s a short window. Certainly, If you stretched it out to 2020, the odds by the end of 2020 will be substantially higher.”

Polling and reporting by Mumal Rathore; Editing by Ross Finley and Chizu Nomiyama and Phil Berlowitz

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