UPDATE 1-Canada dealers stick to June 1 rate hike call

* Primary dealers still unanimous on June rate hike

* Strong economic data in Canada supports call

* European debt crisis key risk to rate outlook

(Updates with commentary, details)

By Claire Sibonney and Jennifer Kwan

TORONTO, May 21 (Reuters) - All of Canada's primary
securities dealers still forecast the Bank of Canada will start
raising interest rates in June to cool a strong domestic
economy, but they caution Europe's debt crisis and volatile
markets mean a hike is not certain.

In a poll conducted after Canadian inflation and retail
data blew past expectations, all 12 dealers said the central
bank would push interest rates 25 basis points higher from the
current record low 0.25 percent.

This would make Canada the first Group of Seven country to
hike interest rates since the financial crisis began. But
economists warned that fresh market turmoil could easily throw
the outlook off track before the June 1 announcement.
[ID:nN21216246]

"I don't think there would be any debate whatsoever if
Canada were an island," said Doug Porter, deputy chief
economist at BMO Capital Markets.

"The domestic economy is screaming for rate hikes, but it
takes a very brave central bank indeed to begin raising rates
in the face of this financial storm."

While tentatively sticking to their forecasts, economists
stressed the decision is still up in the air just days before
the June 1 announcement.

Last month, Bank of Canada Governor Mark Carney said
"nothing is preordained" in the timing of an interest rate
hike. [ID:nN27120558]

"While we still believe rate hikes are coming, the timing
for June will depend on whether equity and commodity markets
can find some stability before then," said Avery Shenfeld,
chief economist at CIBC World Markets.

Global markets remained volatile on Friday despite German
approval of a euro zone rescue package, as investors remained
unconvinced the aid would resolve the debt crisis. [MKTS/GLOB]

"These last handfuls of (Canadian) economic figures have
been helpful in improving the odds of a June decision and I
think ultimately what it's going to come down to now is the
level of concern the bank chooses to express about Europe,"
said Eric Lascelles, chief Canada macro strategist at TD
Securities.

Central bank rate hike expectations, reflected in yields on
overnight index swaps, have fallen hard from April 20 when the
Bank of Canada removed its conditional commitment to hold rates
until June.

At that point the market was pricing in more than a 90
percent chance of a June 1 hike, compared with about 54 percent
on Friday. BOCWATCH

"If the market continues to price out the possibility of a
rate hike in June, I think they will decide to hold. But if
they do that I think that the risks of inflation getting out of
control are growing even more elevated," warned Sheryl King,
chief economist at Bank of America-Merrill Lynch.

The call for slow and steady 25 basis point hikes leading
up to a year-end overnight rate of 1.5 percent was almost
unanimous.

But primary dealers who previously called for more
aggressive 50 basis point moves toned down their forecasts.

"Given what is going on around us, I think the Bank of
Canada will be more prudent and move a little more slowly,"
said Carlos Leitao, chief economist at Laurentian Bank of
Canada.

Laurentian had previous forecast 50 basis point hikes in
July and September.

"As June 1st gets closer and closer and assuming the
extreme nervousness we've seen in the last few days also calms
down a bit, which I think it should, the markets will then
start to price in a 25 basis point rate hike," he added.

DEALER JUNE JULY SEPT

ACTION ACTION ACTION

BOA-MERRILL LYNCH UP 25 UP 25 UP 25

BMO CAPITAL MARKETS UP 25 UP 25 UP 25

CASGRAIN & CO LTD UP 25 UP 25 UP 25

CIBC WORLD MARKETS INC. UP 25 UP 25 UP 25

DESJARDINS SECURITIES UP 25 UP 25 UP 25

DEUTSCHE BANK SECURITIES LTD UP 25 UP 25 UP 25

HSBC SECURITIES UP 25 UP 25 UP 25

LAURENTIAN BANK SECURITIES UP 25 UP 25 UP 25

NATIONAL BANK UP 25 UP 25 UP 25

RBC CAPITAL MARKETS UP 25 UP 25 UP 25

SCOTIA CAPITAL INC. UP 25 UP 25 UP 25

TORONTO-DOMINION BANK UP 25 UP 25 UP 25

Where do you think the bank's key policy rate, now at 0.25
percent, will be at the end of 2010?

BOA-MERRILL LYNCH 1.50 PCT

BMO CAPITAL MARKETS 1.50 PCT

CASGRAIN & CO LTD 1.50 PCT

CIBC WORLD MARKETS INC. 1.25 PCT

DESJARDINS SECURITIES 1.50 PCT

DEUTSCHE BANK SECURITIES LTD 1.50 PCT

HSBC SECURITIES 1.50 PCT

LAURENTIAN BANK SECURITIES 1.50 PCT

NATIONAL BANK 1.50 PCT

RBC CAPITAL MARKETS 1.50 PCT

SCOTIA CAPITAL INC. 1.50 PCT

TORONTO-DOMINION BANK 1.50 PCT

($1=$1.06 Canadian)
(Reporting by Jennifer Kwan, Claire Sibonney and Ka Yan Ng;
Editing by Jeffrey Hodgson)