May 24, 2018 / 6:40 PM / in 5 months

Reuters poll: Cautious on trade and debt, Bank of Canada likely to hold rates

OTTAWA (Reuters) - The Bank of Canada will probably hold interest rates steady on May 30 as uncertain trade policy and indebted consumers necessitate caution, but firmer price and wage inflation will prompt two increases in the second half of 2018, a Reuters poll predicted.

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

The central bank has raised rates three times since July 2017, but took no action at its last two meetings, because it believes the economy has more room to run in the short-term without stoking more inflation.

Policymakers are also keeping a close eye on how heavily indebted Canadians and the housing market adjust to higher borrowing costs, and how uncertainty over the North American Free Trade Agreement has restrained business investment.

At the same time, the economy has gotten off to a mediocre start in 2018 compared with last year’s robust growth rate. The central bank will want to see signs of better momentum before raising rates again, economists said.

That means the BoC will most likely hold rates at 1.25 percent at its next policy decision on May 30, according to 26 of 29 economists surveyed by Reuters May 18-23.

Only three analysts expected an increase to 1.50 percent next week. Financial markets are placing about 30 percent odds on an increase. BOCWATCH

“There is really no urgency to move on rates, and it would be more prudent to wait until July,” said Doug Porter, chief economist at BMO Capital Markets.

The majority of economists say the Bank will next raise rates in the third quarter, with many specifying the July meeting, when it will also release updated economic forecasts.

The recent rise in bond yields might be another reason for the bank to stay its hand next week. As Canadian five-year yields have gone up along with U.S. bonds, some major banks have raised their rates on five-year mortgages.

That means those who want to buy a home or refinance could face higher costs even without the Bank of Canada raising rates.

“The underlying rise in long-term interest rates and the pressure that is putting on mortgage rates is doing some of the work for the bank,” Porter said. “All that will do is heighten their concern over pressing on the brake too hard and cooling the consumer too much.”

Still, economists acknowledged there was an argument to be made for the central bank raising rates again this month, particularly with an increase in the price of oil and domestic inflation sitting just above the bank’s two percent target.

The central bank has also not been shy about surprising markets with rate moves in the past.

“We usually do not like the expression, but saying it is a ‘50-50 call’ is appropriate here,” said Sebastien Lavoie, chief economist at Laurentian Bank.

“A good case could be made to either wait one more time or hike at the end of the month.”

Polling by Kailash Bathija in Bengluru; reporting by Leah Schnurr, editing by Larry King

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