Rate hike expected in first half of year

TORONTO — Most of Canada’s primary securities dealers now expect the Bank of Canada to resume raising interest rates in the first half of this year with economic prospects having brightened in the past month.

In a Reuters poll on Friday the dealers — the institutions that deal directly with the central bank to help it carry out monetary policy — also say the bank will keep its benchmark rate at 1% at its next policy-setting date on Jan. 18.

There are 12 primary dealers, and seven of the 11 surveyed said they expect a rate hike in the first half of the year.

Three of those said it will come on March 1. One of the 12 dealers was not immediately available for comment.

In a December poll, the majority forecast rate increases in the second half of this year with the median prediction of a first hike in July. In the December poll, two dealers predicted a hike in January.

Some dealers cited factors such as the U.S. tax cut deal and risk warnings from the Bank of Canada for revising their views since then.

Rate forecasts by the dealers in Friday’s poll were otherwise scattered through the year and depended on views of when U.S. economic growth would become entrenched and when euro-zone debt woes might subside. The Bank of Canada in recent months has highlighted these variables as risks to economic recovery.

One dealer said the central bank would raise rates by the end of the first quarter to help stem the flood of cheap money that has spurred Canadians to take on heaps of personal debt over the past two years. Personal debt recently reached record

high levels in Canada.

“Don’t blame the consumer for merely following the pricing signals for money they are provided with a low rate environment,” said Stewart Hall, economist at HSBC Securities.

“(It is) an environment that is providing the incentive to borrow and spend while reducing the incentive to save. It is this calculus that is driving our view to a rate hike at the end of Q1/11.”

Another two dealers forecast the first hike would be on April 12, while two more see the first move May 31. Another two said the central bank would push rates higher in July, while there was one call each for September and October.

U.S. ECONOMY, SOVEREIGN DEBT ARE KEY RISKS

The poll was taken after a report showed Canada’s economy created more jobs than expected in December, once again outperforming the United States, after three months of disappointing employment numbers.

The central bank raised interest rates three times last year but it halted the rate hike campaign in view of the tepid U.S. economic recovery, which could weigh on Canada’s economic fortunes because of the massive trading links between the two countries.

The central bank has also made note of the risks from sovereign debt troubles, which could trigger renewed strains in financial markets.

Some of those risks may persist for some time, which explains some of the forecasts for rate hikes to resume later in the year. Forecasters point to a still-weak U.S. housing market as well as a U.S. labor market that needs to gain further traction.

“Those are the two big risks that keep the bank on hold until we see some clarification on how those risks are playing out,” said Sal Guatieri, senior economist at BMO Capital Markets.

“By May we should at least see more signs of stabilization in the U.S. housing market and clearer signs of growth in both the U.S. and Canadian economies to encourage the bank to resume raising interest rates.”

© Thomson Reuters 2011