U.S. Markets

Bank of Canada to hold rates through 2020, call on a knife's edge: Reuters poll

BENGALURU (Reuters) - The Bank of Canada is now expected to hold rates through to the end of next year, according to a slim majority of economists in a Reuters poll, with forecasts on whether or not the central bank holds or cuts sitting on a knife’s edge through 2020.

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

The latest Reuters poll of over 30 economists taken Nov. 19-26 showed the BoC will hold its key overnight interest rate at 1.75% this year and next, flipping from equally narrow expectations for a rate cut early next year in the last poll.

That change in expectations was primarily driven by comments from BoC officials - Governor Stephen Poloz and Senior Deputy Governor Carolyn Wilkins - who spoke last week at separate events about Canada’s monetary conditions being “about right” despite global trade tensions.

Every respondent in the poll expected rates to remain on hold at the conclusion of the BoC's Dec. 4 meeting, in line with market expectations. BOCWATCH.

When asked if the Canadian economy actually needs a rate cut before the end of next year, a slim majority of economists - 13 of 24 - said no. Just a month back, a similar set of economists were slightly inclined toward a cut.

“The Bank is going to be patient here and not going to be in a great rush. ... I think they will want to save ammunition for when the situation potentially deteriorates more significantly, which I am not expecting anytime soon,” said Helmut Pastrick, chief economist at Central 1 Credit in Vancouver.

“But, the global situation is still unsettled given the U.S.-China trade issues and the impact that it is having on commodity prices, which is still important for Canada and overall sentiment as well.”

Notably, four of the top five major Canadian banks expected the BoC to cut rates at least once by end-2020.

The BoC has stayed on the sidelines this year given its strong domestic economy, diverging from its major peers like the U.S. Federal Reserve and the European Central Bank which have already cut rates. The ECB has also re-started its asset purchases program.

While both headline and core inflation have hovered around the central bank’s target of about 2% since May, the Canadian economy was expected to lose growth momentum over the coming year, a separate Reuters survey showed.

“In order to keep inflation in the future where it is today, it would warrant interest rate cuts to build a feed through to the economy to help support inflation at the current levels,” said James Orlando, senior economist at TD.

After growing by a stronger-than-expected annualized rate of 3.7% in the second quarter, Canadian economic growth likely slowed to 1.2% in the third quarter, according to a weekly Reuters poll.

If that forecast is realized, it would put further pressure on the BoC to cut rates next year.

Canada’s house prices were also predicted to rise only modestly over the coming years and will not return to boom times any time soon, a separate Reuters poll of economists and property market analysts predicted.

Still, conviction among economists - 18 of 23 - around what the central bank would do with rates has either decreased or stayed the same over the past month. Only five said they were more confident.

“The BoC’s leaning in favor of long-term financial stability, particularly regarding household debt, remains a roadblock for policy rate cuts. It appears to us only a global recession would force the hand of the BoC to ease,” said Dominique Lapointe, economist at Laurentian Bank Securities.

Reporting and polling by Mumal Rathore; Editing by Ross Finley and Jonathan Oatis