November 4, 2011 / 4:29 PM / in 6 years

Canadian dealers push back rate hike forecasts

TORONTO (Reuters) - Canada’s primary dealers have once again pushed back their expectations for the timing of the next Bank of Canada interest rate hike as persistent global economic headwinds cool domestic growth.

In a Reuters poll on Friday, seven of Canada’s 12 primary dealers, the institutions that deal directly with the Bank of Canada as it carries out monetary policy, forecast the central bank will resume raising rates next year.

The remainder see the bank taking a cue from the U.S. Federal Reserve and keeping rates on hold until 2013.

Four of the primary dealers have pushed back their forecasts for the next rate increase since a similar Reuters poll on October 7, in line with the “lower for longer” theme that has dominated recent thinking.

The poll was conducted after a shock Canadian jobs report for October that showed the economy unexpectedly lost almost all the jobs gained in September, confirming expectations the economy is slowing.

The dealers also had time to digest Bank of Canada Governor Mark Carney’s warning of a likely recession in Europe and of continued weakness in the United States after he slashed the central bank’s growth forecasts for the fourth quarter last week.

“The international weakness that we see that has hurt the U.S. and Europe will certainly catch up to Canada,” said David Tulk, chief Canada macro strategist at TD Securities. “There is only a limited ability for the domestic economy in Canada to carry the mantle of growth without international support.”

“The Bank of Canada has been highlighting the external environment as being where a lot of the downside risks to growth are emanating and we’re not seeing any indication of sustained relief,” said Paul Ferley, assistant chief economist at Royal Bank of Canada.

“So, as a result, we’re assuming the accommodating conditions will continue a little bit longer just to help offset any further deterioration in the external environment.”

Despite gloomier economic predictions, none of the dealers think the central bank’s next move will be a rate cut. Traders, however, are pricing in a higher likelihood of a decrease.

The dealers cited the absence of a North American recession, the fair amount of monetary stimulus already in place, the option of further fiscal policy stimulus, and worries about high household debt as reasons why the central bank won’t be considering a cut just yet.

“The Bank of Canada does not want consumers to believe rates are going to stay low forever, and they are not going to act that way,” said Sebastien Lavoie, assistant chief economist at Laurentian Bank Securities in Montreal.

Editing by Peter Galloway

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