Bank of Canada September rate hike not a lock -RBC

TORONTO, Aug 13 (Reuters) - The Bank of Canada may shy away from raising its key overnight lending rate in September due to the global credit woes that have rattled financial markets, RBC Capital Markets said on Monday.

The central bank had been widely expected to hike interest rates by a one-quarter of a percentage point to 4.75 percent on Sept. 5, but last week's turbulent financial markets cast doubt on such a move.

"If some sense of normalcy returns to markets prior to September 5th, BoC officials will focus on growth and inflation fundamentals and raise rates," Mark Chandler, fixed income strategist at RBC Capital Markets, wrote in a note.

"However, if fear about systemic risk is as prevalent as today ... then they are most likely to pass on raising rates until they can collect more information."

Financial markets were battered last week on worries about big bank and fund losses emanating from the U.S. subprime mortgage market.

Chandler said that even though Canada is not immune to global credit woes, it is somewhat insulated given a resilient housing market and corporations and governments relatively flush with cash.

If the Bank of Canada sticks to the sidelines next month, it could just be buying itself more time to assess conditions ahead of its next scheduled policy date on Oct. 16.

But, according to Chandler, the central bank will likely take some heat regardless of its decision next month.

He said a retreat from raising rates will likely be viewed as "unnecessarily panicky", particularly as other central banks have, so far, held their course.

And if the central bank tightens monetary policy next month, its defense will likely be that its growth forecast is unchanged, which some opponents might say is unrealistic.

"The BoC will have three weeks of information to sift through these factors, not only assessing the possible impact, but also trying to guess whether the market events are temporary or permanent," Chandler wrote.

The Bank of Canada raised rates last month for the first time in more than a year, with a quarter-point hike to 4.50 percent, and left the door open for further increases.