August 18, 2011 / 5:36 PM / 6 years ago

Fed pledge takes Canada rate path "hostage"-dealer

* Primary dealer Desjardins sees 2013 Canada rate rise

* Shifts rate hike call from December 2011

* Cites Fed policy pledge as key reason for revision

TORONTO, Aug 18 (Reuters) - Desjardins Securities expects the next Bank of Canada rate hike will not come until mid-2013, saying the Federal Reserve’s pledge to hold U.S. rates near zero will take Canada’s own rate path “hostage”.

Desjardins had previously expected the central bank to raise interest rates in December this year, and its new call puts them among the most bearish among Canadian primary dealers on rate expectations.

The Fed is likely to be on hold until 2014, well beyond its recent pledge to keep interest rates low for at least another two years, Desjardins said.

“We just expect the recovery to be slow through 2012 and 2013,” said Jimmy Jean, an economic strategist at Desjardins Capital Markets in Montreal.

Also, the Bank of Canada might be reluctant to push its interest rates too far above U.S. levels, because the rate premium would drive the Canadian dollar even higher, putting more pressure on Canada’s export-oriented economy.

“The Fed’s policy will effectively take the BoC’s monetary policy in hostage via the dollar and trade vulnerabilities. We don’t expect the BoC to be able to move until the middle of 2013 as a result,” Jean said, adding he now expects Canada’s economy to grow 2.1 percent this year, compared with a previous view of a 2.7 percent gain.

The Fed’s stance along with the swings in the market, mixed economic data, and the twin debt crises in Europe and the United States have all been reasons behind revised forecasts from several primary dealers.

Canada’s five biggest banks have all said they now see the central bank’s key rate unchanged at 1 percent until 2012. [ID:nN1E77B11K]

Late on Wednesday, TD Securities said “the theme of lower for longer will prevail”, and pushed its rate hike call to July next year, also citing the Fed’s policy pledge and increased downside risks.

Previously, it was the first primary dealer to push its forecast for the next Bank of Canada rate hike into 2012, warning the economy had not fully emerged from the shadow of the financial crisis. [ID:nN14196063] (Reporting by Ka Yan Ng; editing by Rob Wilson)

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