Bank of Canada rate cut bets sink as investors eye post-election spending

TORONTO (Reuters) - Investors are ditching bets that the Bank of Canada will cut interest rates over the coming months as the domestic economy shows resilience and the federal election result adds to prospects of growth-boosting fiscal spending next year.

FILE PHOTO: A sign is pictured outside the Bank of Canada building in Ottawa, Ontario, Canada, May 23, 2017. REUTERS/Chris Wattie

Canadian Prime Minister Justin Trudeau’s Liberal government, already planning to run longer and deeper deficits, will need to cater to left-leaning parties, such as the New Democratic Party (NDP), in return for support after it lost its majority in Parliament in Monday’s election.

“The resulting higher spending and larger deficits may give a temporary lift to growth next year, but will also likely keep the Bank of Canada on hold for longer,” said Doug Porter, chief economist at BMO Capital Markets.

Trudeau’s election platform planned to nearly double the deficit to C$27.4 billion ($21 billion) in the next fiscal year, including higher spending on measures such as old age security and an increase in the amount of money that Canadians would be able to earn before paying tax.

The NDP wants to invest C$15 billion in climate-change measures and create a national pharmacare program, a measure that the Liberals also support.

The Bank of Canada has left its benchmark interest rate on hold this year as Canada added jobs at a robust pace and inflation stayed close to the central bank’s 2% target.

On Tuesday, a Bank of Canada survey said that Canadian firms expect a moderate increase in sales growth over the coming year.

Money markets see almost no chance that the central bank will cut interest rates at the Oct. 30 policy announcement. Chances of a cut by December have fallen to about 10% from more than 90% before the Bank of Canada's last rate announcement in September. BOCWATCH

Still, strategists see limits to how much the Bank of Canada can diverge from other central banks, such as the Federal Reserve and the European Central Bank, that have already eased.

The Bank of Canada has been worried about the impact on Canada’s economy of slower global growth due to the trade war between the United States and China.

But if there is no escalation in the trade war and Canada gets fiscal stimulus, then the central bank could choose to cut just once rather than multiple times, Mark McCormick, North American head of FX strategy at TD Securities, told Reuters.

“They could classify it as an insurance cut, or cushioning the blow,” McCormick said.

Reporting by Fergal Smith; Editing by Sandra Maler