Canada rate hike views pushed back as economy struggles: Reuters poll

TORONTO Fri Feb 8, 2013 6:09pm EST

TORONTO (Reuters) - Half of Canada's primary dealers have recently pushed back forecasts for the timing of the central bank's next interest rate hike, a Reuters poll showed on Friday after weak jobs and housing starts data suggested the economy will struggle in 2013.

The economic figures released on Friday were the latest in a string of dismal indicators. Earlier reports had prompted the Bank of Canada to say on January 23 that a rate hike would be further in the future than it had once thought.

The median forecast in Friday's Reuters poll of Canada's 12 primary dealers, the institutions that deal directly with the Bank of Canada as it carries out monetary policy, showed their median forecast for the next rate hike is still the first quarter of 2014, unchanged from a poll on January 23.

But the latest survey showed that since then six dealers have pushed their forecasts further into the future.

"We're becoming increasingly concerned about how soft growth will be," said Doug Porter, chief economist at BMO Capital Markets, which on Wednesday changed its target date for a rate hike to April 2014 from a month earlier.

Scotiabank went further, saying a rate hike won't happen until 2015. It had previously expected a move in the first quarter of next year, but it said the deteriorating economy and expectations the U.S. Federal Reserve will not tighten its monetary policy until at least 2015 have changed its view.

RARE TIGHTENING BIAS

The Canadian central bank has been an outlier among its peers in major economies, signaling since last April that rates would need to rise. The bank was the first to hike following the global financial crisis.

But it has been forced to temper that attitude, saying after its January policy meeting that the economy will likely not hit full capacity until the second half of 2014. In October, the bank had said it expected to close the output gap by the end of 2013.

"In a sluggish global economy, we simply don't have enough domestic demand to give us the growth necessary to justify a rate hike," said CIBC World Market's chief economist, Avery Shenfeld, who had penciled in the first quarter of 2014 as his target for a rate hike a year ago.

Dealers surveyed on Friday said the housing market was also a concern.

Dizzying household credit growth and a hot housing market last year prompted the federal government to impose tighter mortgage rules. But data, including unexpected soft housing starts figures on Friday, show that activity in the real estate sector is now dropping rapidly.

"Some of the domestic fatigue through the housing market as orchestrated by tighter mortgage regulation is beginning to bite," said David Tulk, chief Canada macro strategist at TD Securities.

"The Bank (of Canada) is walking a very tight line between keeping one eye on household leverage and respecting an economic backdrop that remains subdued at best."

TD, which had expected a hike as early as October of this year, now sees it coming next January. Bank of America-Merrill Lynch last week pushed out its forecast for a rate increase to the second half of 2014 from the fourth quarter of 2013.

Even the most bullish forecaster, Deutsche Bank Securities, nudged its rate hike expectations down to 1.25 percent by the end of 2013 from 1.50 percent, and said Friday's data tempered its view on growth.

Most primary dealers expect the benchmark interest rate to remain at 1 percent at the end of this year. The median forecast saw interest rates rising to 1.75 percent by the end of 2014.

"Both the employment and the housing starts numbers - they were ugly. But not necessarily unexpected," said Carlos Leitao, chief economist at Laurentian Bank. "By the same token, one shouldn't over-dramatize it ... I think we are now, in both cases, more back to reality."

(Editing by Jeffrey Hodgson; and Peter Galloway)