No BoC rate hike until Q1 2013

TORONTO • A deteriorating European economy and weak global growth will keep the Bank of Canada from raising rates for at least another year, though an interest rate cut looks highly unlikely, according to a Reuters survey.

The Reuters poll of 41 economists and strategists released on Tuesday showed the median forecast for the next interest rate hike was pushed back by three months to the first quarter of 2013 from the fourth quarter of 2012 projected in a November poll. The Bank of Canada’s target for the overnight rate — its main policy rate — has been at 1% for more than a year.

“The longer we spend struggling with slower growth and the longer we go without the Europeans coming to some cohesive policy solution, the worse the economic drag will be,” said David Tulk, chief Canada macro strategist at TD Securities.

“You get the sense that growth I think is likely to remain lower for longer, just like interest rates.”

Investors in the first quarter of 2012 are expected to focus on the heavy supply of eurozone debt coming due, with fears about a possible lack of demand at auctions. Italian and Spanish bond sales in particular are viewed as the next big tests.

Some Canadian economic data has also been worrisome. A Bank of Canada business survey on Monday showed an increasing number of firms are pessimistic about the rate of sales growth, further reducing pressure for the central bank to take interest rates higher.

The most recent domestic jobs report also disappointed, reversing a trend that saw Canada outperform the United States both during and after the global financial crisis.

Monthly employment data on Friday showed Canada missed forecasts while the U.S. beat them. This gives the Bank of Canada even less impetus to tighten policy before the U.S. Federal Reserve, which has said it expects to keep its key interest rate near zero through mid-2013.

But many analysts expect an even longer pause, and bet the Fed’s next move will be to stimulate the economy, rather than tighten monetary policy.

“If the Fed comes out with its published interest rate forecast at the end of the month and says the consensus points to an even longer hold than the middle of 2013 then that could handicap the Bank of Canada to an even greater extent,” said Derek Holt, vice president of economics at Scotia Capital.

Yet many analysts say the case for an interest rate cut is difficult. Governor Mark Carney has repeatedly warned about the dangers of Canadians borrowing too much as a result of very low interest rates. Data last month showed the level of household debt swelled to another record high in the third quarter.

“A cut in the policy rate anytime in 2012 is extremely unlikely. It would take a global recession of 2008 proportions for the BoC to even consider cutting policy rates,” said Carlos Leitao, chief economist at Laurentian Bank Securities in Montreal. “In our view, 1% is the new, effective, zero-bound.”

Of the 41 contributors, 35 see a rate hike happening after the second quarter of 2012. Five forecasters — BNP Paribas, Capital Economics, Goldman Sachs, IFR Markets and ING Financial — predicted a rate cut across the forecast horizon, up from only three forecasters in the last poll. All five expect the cut by mid-2012.

The possibility of an ease has been anticipated in overnight index swaps for some time, though the timing has been pushed out.

Forecasts for official interest rates at the end of 2012 also dropped from the previous poll — with the median target declining to 1%, from 1.25% in November — indicating one less rate increase next year than was previously assumed.

Interest rate expectations for the four quarters of 2012 have been downgraded continuously in all nine global Reuters polls conducted since last January, with the target for the first quarter of 2012 revised down to 1% from 2.25%.

The poll showed a 99% probability there won’t be a change in rates at the next policy announcement on Jan 17.