Bank of Canada seen hiking rates in first half of 2011

TORONTO - The Bank of Canada is unanimously expected to keep interest rates on hold next week, but the uneven economic recovery has primary dealers and global forecasters divided on the timing of the next hike in 2011.

The Reuters poll, released on Thursday, showed 93% median probability that the Bank of Canada will keep its key rate at 1% at its next policy announcement date on Dec. 7, with all 44 forecasters polled predicting no move.

Among the 42 that forecast the central bank’s next hike, the majority saw it happening in the first half. The median forecast for the May 31 policy date has the rate rising to 1.25%.

But among the 12 Canadian primary dealers — the institutions that deal directly with the central bank to help it carry out monetary policy — the majority forecast rate hikes in the second half with a median prediction of a first hike in July.

When compared with a similar poll taken in October, the more recent survey showed rate hike forecasts had been moved deeper into 2011.

Thirty of the 44 forecasters surveyed say the central bank will still be at 1 percent after March 1, a more pessimistic view than the last poll.

“Given that the Bank of Canada had indicated that they didn’t want to see that great a divergence with U.S. rates and the Fed was actually doing quantitative easing, it made sense to push out the Canadian rate hike as well as opposed to adamantly defending a Q1 move,” said David Watt, senior fixed income and currency strategist at RBC Capital Markets.

“We’ve had a lot of recovery and we’re seeing some fade at the present time, so you get that caution that maybe the domestic side of the economy is not strong enough to offset the still sizable trade hit and currency strength.”

A report out on Tuesday showed Canada’s economy disappointed in the third quarter with the weakest growth rate in a year, while the economy shrank outright in September, adding pressure on policy makers to safeguard the patchy recovery.

Bank of Canada Governor Mark Carney in October gave a blunt assessment of the global and Canadian economic recoveries, saying the central bank would plot its next move with extreme caution.

Massive new monetary stimulus by the U.S. Federal Reserve to support a flagging U.S. economy also prolongs low rates south of the border, and Canada is seen not wanting to race too far ahead of its largest trading partner.

Mr. Watt noted that a concern for the central bank has been a Canadian dollar strengthening near parity without having seen a strong rebound in oil and natural gas prices.

“Sluggish Canadian growth and an elevated exchange rate will keep the Bank of Canada on hold until well into 2011 if, as we expect, core inflation readings return to their more muted earlier monthly trend,” said Avery Shenfeld, chief economist at CIBC World Markets.

“The U.S. Fed should still be on hold at a near-zero funds rate in early 2012, and wider interest-rate differentials would push the (Canadian dollar) to levels that would be too damaging to Canada’s export prospects.”

Estimates of the central bank’s target for the overnight rate by the end of 2011 range between 1% and 2.5%.

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