UPDATE 2-Dealers see Bank of Canada rate hike on Dec. 7
Fri Oct 22, 2004 02:41 PM ET
By Cameron French
TORONTO, Oct 22 (Reuters) - All but one of Canada's primary bond dealers expect the Bank of Canada will raise interest rates in December, as it tries to hold back inflation in an economy nearing capacity.
According to a Reuters poll on Friday, 11 of Canada's 12 dealers see the bank raising its key overnight rate by 25 basis points to 2.75 percent on Dec. 7, following similar increases in September and October. One dealer saw no move in December.
Seven of 12 dealers expect another rate increase at the bank's Jan. 25 policy announcement. Seven also see a rate hike on March 1.
Merrill Lynch would not give specific predictions for January or March but said it expects a 25 basis point increase at one of the two meetings.
Other dealers also said their January or March predictions could be subject to change, depending on what happens between now and then.
"The end point is really the important thing there. In other words, we see them pausing at least one of the next three meetings, but only one," said Doug Porter, senior economist at BMO Nesbitt Burns.
The central bank's monetary tightening has come in response to a push towards capacity that has come much sooner than it had expected.
But the bank has given somewhat mixed signals on the economy this past week, raising its growth forecast for Canada this year to 2.9 percent from 2.7 percent, but lowering its 2005 forecast to 2.9 percent from 3.5 percent, partly in anticipation of slower growth in trade.
The bank also highlighted strong oil prices as a potential risk to growth, and noted the sharp rise of the Canadian dollar, raising worries that the appreciation could harm the export sector.
The mixed message prompted few economists to revise their predictions, but many said their forecasts could change quickly if the economy shows signs of running into trouble.
"These are risk factors that we must take into account, but for now still think they'll continue to normalize interest rates," said Stefane Marion, assistant chief economist at National Bank Financial.
"The degree of confidence will depend on what happens on the currency front, and as well on the oil price front."
If the U.S. Federal Reserve decides to slow the pace of its own interest rate increases, the Bank of Canada might do the same to keep Canada's rate premium over the United States from widening too quickly, analysts said.
The Bank of Canada's overnight rate corresponds to the U.S. Fed funds rate, which is currently at 1.75 percent. The Fed is expected to raise the rate at its next meeting in December. |
