Bank of Canada to delay rate hikes to 2012: TD Bank

TORONTO (Reuters) - Toronto-Dominion Bank TD.TO became the first primary dealer to push its forecast for the next Bank of Canada rate hike into 2012, warning the economy has not fully emerged from the shadow of the financial crisis.

A woman walks past the Bank of Canada building in Ottawa July 21, 2009. REUTERS/Blair Gable

TD, Canada’s second-biggest lender, said on Tuesday it expects that the Bank of Canada will next raise its key policy rate by a quarter-point in January to 1.25 percent.

It’s the bank’s second revised call in as many months. TD last month shifted its long-held forecast of a July interest rate hike to September.

“All the reasons for them to hold off in September apply just as equally to remaining on hold through the balance of the year,” said David Tulk, chief Canada macro strategist.

“If you look at the balance of risk, it’s still is tilted firmly to the downside.”

The pace of Canada’s economic expansion is widely expected to slow this year following robust 3.9 percent annualized growth in the first quarter. Weakening U.S. growth, Japan’s earthquake and Europe’s ongoing sovereign debt woes have all hurt the Canadian outlook.

The Bank of Canada last year became the first central bank among the Group of Seven rich economies to tighten monetary policy after the financial crisis. But it has kept its benchmark policy rate at 1 percent since last September, following three successive increases.

TD’s revised call puts it more in line with current pricing of overnight index swaps, which trade based on expectations for central bank policy. The swaps market has not fully priced in the prospect of a rate hike at any of the bank’s remaining four policy-setting dates this year.

A May 31 Reuters survey of Canada’s 12 primary dealers -- the institutions that deal directly with the central bank as it carries out monetary policy -- showed half forecast the Bank of Canada’s first 2011 rate hike will happen in September. The other half were split on July and October. <CA/POLL>

TD expects rates will rise by 25-basis-point increments next year and bring the Bank of Canada’s target for the overnight rate to 2 percent by the middle of 2012.

It then expects the central bank to move to the sidelines to reassess the outlook. TD see the key rate at 3 percent in 2013.

The bank expects the U.S. Federal Reserve will begin hiking in January 2012 as well, but take a pause when it reaches a fed funds target rate at 1 percent from the current 0.25 percent.

Editing by Jeffrey Hodgson