Bank of Canada to hold rates to late 2017, Brexit immediate risk: Reuters poll

By Anu Bararia

(Reuters) – The Bank of Canada will keep interest rates unchanged for at least another year given the still-depressed price of oil, a major export, and risks to global economic growth from Britain’s shock vote to leave the European Union, a Reuters poll found.

“Brexit could lead to slower world growth including (in) the U.S. which would hurt Canada’s exports, which the BoC sees as the key to growth,” said James Blumenthal, chief Canada market analyst at Informa Global Markets.

Britain’s vote in the Brexit referendum on June 23 has hammered financial markets and rattled businesses.

While economists still forecast a Canadian rate hike around the end of next year, expectations have been delayed several times in the last three months.

Over 40 economists polled this week unanimously forecast the BoC would hold rates at 0.5 percent at its July 13 meeting. Rates are forecast to rise in late 2017 and reach 1.00 percent by mid-2018, according to the poll.

Primary bond dealers, however, are less optimistic and predict a rate hike only in early 2018, according to a snap Reuters survey last week.

BoC Governor Stephen Poloz has long pinned his hopes on an export-led recovery driven by stronger U.S. demand, and spurred on by a weaker Canadian dollar.

But financial market turmoil following the Brexit vote has reduced prospects the Fed will hike rates even once this year, despite evidence the economy is performing well, if still not generating much inflation.

Rate futures contracts suggest a one-in-five chance of another Fed rate hike after its first one in nearly a decade last December even as far out as June 2017, according to CME Group data.

“The BoC is likely to follow the U.S. Federal Reserve – with a slight lag – in gradually raising short-term interest rates,” said Scott Brown, chief economist at Raymond James.

Almost half of the economists in the poll who answered an extra question rated a U.S. slowdown as the biggest risk to the BoC’s growth forecasts this year.

A handful of economists predicted a 25 basis point cut as the BoC’s next move, although there was only a 30 percent median probability.

Another rate cut would risk further fueling Canadian households’ struggle with high levels of debt. The ratio of household credit market debt to income was 165.3 percent in the first quarter.

(Polling by Anu Bararia; Editing by Richard Chang)