No rate hike until second quarter of 2013: poll

Bank of Canada expected to hold target at one per cent

TORONTO – Sluggish domestic growth and uncertainty about the global economy likely will keep the Bank of Canada from raising rates until the second quarter of 2013, according to a Reuters survey.

The Reuters poll of 42 economists and strategists released on Wednesday showed the median forecast for the next interest-rate hike was pushed back by three months from the first quarter of 2013 projected in a January poll.

The results were similar to Feb. 17 poll of Canadian primary dealers, which forecast the next rate hike would happen in the third quarter of 2013.

The Bank of Canada’s target for the overnight rate – its main policy tool – has been at one per cent since 2010.

None of the respondents expected Bank of Canada governor Mark Carney to alter the rate when the central bank makes its scheduled interest rate announcement on March 8.

Economists predicted the central bank will stay the course to align itself more with the U.S. Federal Reserve, which has said it will likely hold rates near zero at least through late 2014.

“If the Bank of Canada moves on rates too soon, it would push the Canadian dollar to the moon and that would kill our exports and possibly tip our economy into recession,” said Sal Guatieri, chief economist at BMO Capital Markets.

Canada’s dollar has soared along with equity markets so far this year as commodity prices have benefitted from an easing of Europe’s debt crisis and continued signs of a U.S. economic recovery.

The currency is expected to hover around parity 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.

While the U.S. economy is showing signs of progress, Canada’s has stumbled recently. Canada added just 2,300 net new jobs in January and saw its unemployment rate rise to 7.6 per cent from 7.5 per cent in December.

Growth also slowed, as the latest gross domestic product numbers showed Canada’s economy contracted slightly in November, defying forecasts for a modest increase.

A slowing of Canada’s once-hot housing market and escalation in household debt to record levels gives the Bank of Canada even less impetus to tighten policy.

A Reuters poll released Feb. 21 showed economists expect Canadian house-price gains to stall in 2012.

“The domestic fundamentals of the Canadian economy are fragile,” said Sheryl King, head of Canadian economics at Bank of AmericaMerrill Lynch.

King broke with consensus by forecasting the Bank of Canada would cut its rate 75 basis points in the second half of this year, pre- dicting conditions in Europe and the United States could deteriorate significantly.

King said the eurozone banking sector faces tough de-leveraging targets this summer and U.S. policymakers face a looming showdown over whether to extend Bush-era tax cuts.

These events could lead to a seizing up in the global funding market that would pressure the euro and greenback, said King, adding it would put “a lot of upward pressure on the Canadian dollar.”

The possibility of an easing has been anticipated in overnight index swaps for some time, though odds have been scaled back as the situation in Europe stabilized.

Forecasts for official interest rates at the end of 2012 were unchanged from the previous poll, with the median target remaining at one per cent.