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BoC seen holding rates until late 2012: poll

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The Bank of Canada will not raise interest rates again until the fourth quarter of next year as Europe's worsening debt crisis dims the outlook for the global economy, according to a Reuters survey.

The Reuters poll of 40 economists and strategists released on Wednesday showed the median forecast for the next interest rate increase was pushed back by three months to the fourth quarter from the third quarter of 2012 projected in an October poll.

The median view was still stronger than that of many primary dealers calling for the next move in 2013, closer to the timeline of the U.S. Federal Reserve.

"Even though there is so much uncertainty in the global economy at the moment, Canada's economy we think still remains in relatively good stead," said Dawn Desjardins, assistant chief economist at Royal Bank of Canada.

"In an environment where our economy is growing at a decent clip, not over the top but at a decent clip, the U.S. economy is back on its feet ... some of the external risks that are concerning the bank right now will abate and they will be in position to start to very, very, very gradually remove some of the stimulus."

Data on Wednesday showed a stronger-than-expected third quarter rebound in domestic growth after a fall in the second quarter.

But overall, Canadian economic data has been mixed - including a shocking jobs loss last month - and analysts are still focused on macro events to set direction for monetary policy.

Two years into Europe's sovereign debt crisis, investors are fleeing the euro zone bond market, European banks are dumping government debt, deposits are draining from south European banks and a looming recession is aggravating the pain, fueling doubts about the survival of the single currency.

Bank of Canada Governor Mark Carney has also been sounding more dovish, warning last week that Europe's debt crisis was "barely contained," while urging leaders to act immediately.

"To me that sounds like he's very, very nervous and we're just close to going through that threshold where he thinks it's not contained," said Sheryl King, head of Canadian economics at Bank of America-Merrill Lynch (BofAML).

An increasing number of the respondents - including BofAML, Capital Economics, and ING Financial Markets - are predicting a rate cut, a possibility that has been anticipated in overnight index swaps for some time, with a 25-basis point drop almost fully priced in by July.

"The persistent bad news out of Europe, the fact that Asia has shown more vulnerability than we originally thought it was going to, the fact that the United States still doesn't have its fiscal house in order either, you just add it up and there are just so many triggers that could push the financial markets in to some sort of big spike in volatility," added King.

Forecasts for official interest rates at the end of 2012 also fell from the previous poll - with the median target declining to 1.25 percent, from 1.5 percent in October - indicating one less rate increase next year than was previously assumed.

Interest rate expectations for the four quarters of 2012 have been downgraded continuously in all eight global Reuters polls conducted since January, with the target for the first quarter of 2012 revised down to 1 percent from 2.25 percent.

Of the 33 common contributors in the two most recent polls, 16 have downgraded their end-of-quarter forecast for at least one quarter across the time horizon.

Only one of the 33 common contributors upgraded their forecast for the first half of 2013 in the current poll from the October survey, while none of the common contributors upgraded their forecasts for 2012.

The poll showed a 90-percent probability there won't be a change in rates at the next policy announcement on December 6.

The survey was conducted November 25 - November 29.

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