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bank-of-canada TORONTO: The Bank of Canada will hold off raising interest rates until the fourth quarter of 2013 but will continue to talk about a future hike when it sets policy next week, a Reuters poll of market forecasters found.


None of the 41 forecasters polled by Reuters expected the central bank to change its benchmark rate on Dec. 4, keeping the rate at a below-inflation 1 percent.


"They will keep their guidance sufficiently vague as to retain the anti-cut bias which is their prime focus," said Derek Holt, vice president of economics at Scotiabank.


"But it would be na?ve for markets to assume that this means that the Bank of Canada is anywhere close to actually hiking."


The Bank of Canada has said since April that it plans to raise borrowing costs eventually, a hawkish tone that contrasts with that in other major global economies where central bankers are struggling to stimulate sluggish economies.


Benjamin Reitzes, senior economist at BMO Capital Markets, expects no change in next week's Bank of Canada message.


He said the bank will likely wait until next year to tone down its "optimistic" forecast a little - current forecasts of 2.5 to 2.6 percent growth for the next four quarters seemed "a little high, given the headwinds that are still facing the Canadian economy."


The median forecast for the first quarter-point rate hike is for the fourth quarter of next year, unchanged from that in the previous Oct. 18 poll.


The median forecast among Canada's 12 primary dealers, the institutions that deal directly with the central bank as it carries out monetary policy, was also for a rate hike in the fourth quarter of 2013, unchanged from the forecast in a primary dealers poll conducted Oct. 24.




The market has repeatedly pushed back its forecast on the timing of the next Canadian hike, given the slow global economic recovery and concern about the impact that problems in Europe, the United States and elsewhere will have on Canadian growth.


The vast majority of forecasters expected the central bank to retain its tightening bias on Dec 4. Ahead of the last meeting, in October, only 15 of 36 expected the bank to stay hawkish.


"Tightening bias will remain intact, especially given that the Bank of Canada won't have any clues regarding to the (US) fiscal cliff and that the beginning of the turning point in Canada's economy has just started," said Sebastien Lavoie, an economist with Laurentian Bank of Canada BLC Securities.


Thirty respondents predicted the Bank of Canada will also keep the tightening bias for the next 12 months, while seven expected the bank to drop its bias.


This is a significant change from the October poll when economists were split on whether the bank would drop its tightening bias at some point in the next 12 months.


Scotiabank's Holt highlighted the slowing housing sector as a risk, given that a robust housing market has long been a driving force for economic growth.


"As the shine comes off Canadian housing, the economy's challenges are migrating more toward domestic risks with the household sector at leveraged peaks across just about every measure of activity amid profound regulatory tightening of credit conditions," he said.


Scotiabank is among the more bearish forecasters, predicting the first hike sometime during the first quarter of 2014.


Bank of Canada Governor Mark Carney, named on Monday as the next governor of the Bank of England, needs to take account of soaring household debt and a hot housing market that's finally showing signs of cooling as he sets rates.


He must also watch international issues and be cautious not to raise rates too far in advance of the Federal Reserve, something that would likely drive up an already strong Canadian dollar and hurt exporters.


"Conditions remain challenging for the Bank of Canada," said Ian Pollick, fixed income strategist at Royal Bank of Canada.


"At the end of the day, the paradox remains whereby the Bank of Canada is forced to develop domestic monetary policy within the shackles of international influences."


Markets have priced in almost no chance of a rate hike in December and a small chance of a hike in the fourth quarter of next year, according to yields on overnight index swaps, which trade based on expectations for the policy rate.


Copyright Reuters, 2012


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