TORONTO (Reuters) - Most of Canada’s primary dealers expect the Bank of Canada to keep interest rates steady until at least 2013 as subdued domestic economic growth and persistent global turbulence keep the central bank on the sidelines.
In a Reuters poll conducted on Friday, the median forecast for the Bank of Canada policy rate was for 1 percent at the end of 2012. At the end of 2013, the median prediction is for 1.5 percent.
Eight of Canada’s 12 primary dealers, the institutions that deal directly with the central bank as it carries out monetary policy, predict the central bank will resume raising rates next year or in 2014.
One institution sees the Bank of Canada cutting its rate by the end of 2012, while two see it moving higher at the end of the year. Another has no forecast on the timing of the bank’s next move.
Economists anticipate the central bank will keep rates steady as it awaits signals from the U.S. Federal Reserve on how it might move next. At its January policy meeting, the Fed said the economy was likely to warrant exceptionally low interest rates at least through late 2014.
A survey by the New York Federal Reserve found that U.S. primary dealers, on average, forecast the likeliest timing for the first U.S. interest rate increase in the first half of 2014.
“It will be very difficult for the Bank of Canada to increase their rates while the Federal Reserve keeps its rate steady,” said Benoit Durocher, senior economist at Desjardins Securities.
“The danger is to see a big increase in the Canadian dollar, which could be a negative factor for the Canadian economy, so the Bank of Canada has to be prudent in their increase.”
Canada’s dollar, which recently cracked parity with its U.S. counterpart for the first time since October, is expected to hover around the one-for-one level with the greenback for the rest of the year, a Reuters poll earlier this month showed.
Higher interest rates tend to help currencies strengthen by attracting international capital flows, and the prospect of monetary easing typically weakens them.
A strong Canadian currency is arguably one of the last things the domestic economy needs to contend with right now, said Doug Porter, deputy chief economist at BMO Capital Markets.
“The manufacturing sector is already under incredible competitive pressure because of the strength of the currency. The bank - while they don’t talk about it too much - they are quite concerned about the competitive challenge faced by manufacturers,” he said.
But Porter added if data continues to show an acceleration in the U.S. recovery, low rates may not be needed for so long.
“While Canadian rates aren’t joined at the hip with the U.S. they can only deviate so far,” he said.
“I think we may need the full year of better than expected numbers to fully bring some of the dovish Fed members on board.”
The poll was conducted after data on Friday showed Canada’s annual inflation rate rose more than expected in January, boosted by higher energy and transportation prices. However, the increase was generally not seen as strong enough to spur the Bank of Canada to raise interest rates this year.
The bank held its key policy rate at 1 percent on January 17 and forecast a faster domestic recovery than expected despite an increasingly worrying outlook for the global economy.
While most economists expect the central bank to keep rates on hold this year, the overnight index swap market has priced in a slight possibility of easing. But traders reduced bets on a rate cut in the second half of 2012, following the unexpectedly strong inflation data.
Sheryl King, head of Canadian economics at Bank of America-Merrill Lynch, foresees a hefty 75 basis point cut by year-end as Europe-induced headwinds rattle investor confidence.
News linked to Greece’s ability to secure a new rescue package worth some 130 billion euros has swayed global currency, stock and commodity markets in recent months.
Meantime, Moody’s warned this week it might cut the credit ratings of 17 global and 114 European financial institutions, reinforcing concerns about the impact of the euro zone debt crisis on the world’s financial system.
“The trends in Europe are going to get out of control and it’s going to force the Bank of Canada to ease to accommodate the tightening in credit conditions that will likely occur,” King said.
Additional reporting by Claire Sibonney; Editing by Jeffrey Hodgson and Rob Wilson