BENGALURU (Reuters) - The Bank of Canada is expected to hold policy steady for the rest of this year, with calls for the next hike in early 2020 resting on a knife’s edge, a Reuters poll showed, the latest dulling of rate expectations for a major central bank.
Just last month, a majority of economists said the overnight rate would rise to 2.0 percent in the third quarter of this year, followed by another rise next year.
The findings from the April 12-16 poll of over 40 economists brings expectations for the BoC in line with those for the U.S. Federal Reserve and other major central banks, which are now forecast to stay on the sidelines this year.
The Canadian economy has taken a hit from the mandatory production cut of oil - its biggest export - a slowdown in the housing market and wilting business sentiment over worries surrounding the U.S.-China trade war.
“Although the Bank of Canada still sports a directional bias in its forward-looking language, referring to ‘future rate increases’ in the March announcement, this likely reflects the fact that policy rates are still negative in real terms,” noted Douglas Porter, chief economist at BMO Capital Markets.
“However, this doesn’t preclude a Fed-comparable desire to stand pat given the substantial risks posed by higher interest rates - given a record-high household debt-to-income ratio - along with global economic headwinds and trade uncertainties.”
All economists polled said the BoC will hold rates at 1.75 percent at its April 24 meeting and about 60 percent of them say they will stay there through to the end of this year.
The median forecast shows the central bank will hike in the first quarter of next year to 2.0 percent, but the sample was split. The rates are forecast to stay put after that through to end-2020.
Almost 90 percent of economists who answered an additional question said a rate cut was unlikely by end-2020 as they remain hopeful the economy will muddle through its current rough patch.
“Those that think the softness will continue will point to signs of slowing growth in the U.S. and Europe, declines in global trade volumes, an inversion of the yield curve, and declines in business and consumer confidence,” noted Jean-François Perrault, chief economist at Scotiabank.
“While these factors are acting to hold back growth to some extent, fundamentals remain generally solid and our models continue to suggest that the probability of a recession in Canada is very low.”
The recent rise in oil prices contributed to a Canadian inflation increase to 1.9 percent in March, just below the central bank’s 2 percent target. A separate Reuters poll showed oil prices are expected to rise over the coming year.
While that may help underpin the economy, a major oil and natural resources exporter, the growth outlook was cut in the latest poll.
Gross domestic product (GDP) growth was forecast to average 1.6 percent this year and 1.7 percent next, a downgrade from 1.8 percent predicted for both those years in the January poll.
The median probability of a recession in the next 12 months was 20 percent, and 27.5 percent in the next two years. That compares with a 25 percent probability of a U.S. recession in the next 12 months and 40 percent chance in the next two years.
Reporting and polling by Mumal Rathore; Editing by Ross Finley and Chris Reese