Oct 18, 2011 – 12:15 PM ET
By Andrea Hopkins
TORONTO – The Bank of Canada will keep rates on hold until the third quarter of next year amid slow global growth and the risk that Europe’s debt crisis will linger on, according to a Reuters survey released on Tuesday.
The Reuters poll of 40 economists and strategists showed the median forecast for the next interest rate increase was pushed back by three months from the second-quarter of 2012 projected in an August poll.
Analysts said Canada’s central bank need to raise borrowing costs less than they previously thought, because the domestic economy has not recovered as strongly as expected and the European debt crisis still is dampening the global outlook.
“There is slightly more slack left in the Canadian economy than where it was presumed a couple of months ago, based on how the second quarter panned out,” said Mark Chandler, head of Canadian fixed income and currency strategy at Royal Bank of Canada.
“We’ve got a better handle on the size of the rebound in Q3, and it was maybe a bit weaker than people thought.”
Forecasts for official interest rates at the end of 2012 are also down to a median target of 1.5% from 1.75% in the August poll, suggesting one fewer rate increase next year than was previously expected.
Of the 35 forecasters who contributed to both polls, 26 downgraded their forecast in one or more quarter and seven downgraded their forecasts for all five of the quarters forecast. Just two upgraded their forecast for the second half of 2012.
Only two of the respondents predicted a rate cut, a possibility that has been priced in by overnight index swaps for some time.
Goldman Sachs and BNP Paribas both said they expected the Bank’s next move, in December, to be a rate decrease.
Goldman Sachs forecast a 50 basis point cut before the end of this year — a dramatic shift from the previous poll, when they were looking for a rise of 25 basis points.
BNP Paribas saw a more modest quarter-point cut by year-end.
They were the only banks to forecast any move by the Bank of Canada in 2011, with all of the other respondents expecting the Bank to stand pat until 2012 and then raise rates.
“Our expectations for a 25 basis point cut in Canada are largely dependent on the global backdrop and the timing of another round of quantitative easing by the U.S. Federal Reserve — which we expect in December or January,” BNP Paribas said.
“While we expect a 25 basis point cut in order to provide insurance, we anticipate the BoC will want to restore their policy rate as soon as possible,” it added.
The poll showed a 95% probability there won’t be a change in rates at the next policy announcement on Oct. 25.
The survey was conducted Oct. 12-Oct. 18.
© Thomson Reuters 2011