October 7, 2011 / 11:13 PM / in 6 years

Dealers push back rate hike forecasts: Poll

TORONTO (Reuters) - Canada’s primary dealers now expect the Bank of Canada to raise interest rates in September 2012, signaling a gloomier outlook as concerns over stalled global economic momentum persist.

The median forecast in a Reuters poll on Friday was for an interest rate hike in September, compared with expectations of a July tightening in a similar poll on September 7.

Forecasts for the Bank of Canada’s key policy rate at the end of 2012 also trended down, with the median falling to 1.5 percent from 1.75 percent just a month ago. That implies one less quarter-point rate hike next year.

Primary dealers are the institutions that deal directly with the Bank of Canada as it carries out monetary policy.

None of the dealers expect a rate cut, even though overnight index swaps are pricing in this possibility.

Instead, seven expect a hike at some point next year. Another four dealers predicted the bank will take a cue from the U.S. Federal Reserve, keeping rates steady until 2013.

U.S. short-term interest rate futures traders see a better-than-even chance a rate hike will not come until the Fed’s November 2013 policy-setting meeting.

“The short-term priority for the Bank (of Canada) will be to support the economy in the face of brisk global headwinds. By support I mean keeping interest rates historically low,” said Sal Guatieri, senior economist at BMO Capital Markets.

While some recent Canadian data has been promising, five of the 11 dealers surveyed pushed back their forecasts on expectations that global risks will persist. Recent market volatility has driven the Canadian dollar to a 13-month low and sent Canadian stocks into bear territory.

Even before the worst of the turmoil, the Bank of Canada said September 7 there was less need to remove monetary stimulus given external risks. These include the persistent European debt crisis and anemic U.S. growth. The bank held its key target for the overnight rate at 1 percent earlier that day.

“There are increasing pressures in financial markets related to Europe, so the external risks that the Bank has talked about are, if anything, intensifying,” said Paul Ferley, assistant chief economist at RBC Capital Markets.

“With those external risks increasing, there is more reason for the Bank to remain on hold.”

Concern about possible inflation pressures has taken a back seat to the Bank’s short-term priority of fostering growth in the face of heightened global uncertainty.

“The current inflation readings are not really top of mind. What they are looking at is the extent to which those will either accelerate or decelerate in 2012. So much of that depends on what political decisions are made in the U.S. and Europe that could affect Canadian growth,” said Avery Shenfeld, senior economist at CIBC World Markets.

Editing by Jeffrey Hodgson

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