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Dealers push back rate hike forecasts

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Most of Canada's primary dealers have pushed back their forecasts for the next Bank of Canada rate hike over the past month, with two seeing no increase this year, a Reuters poll showed on Wednesday.

The central bank is expected to keep interest rates unchanged until at least September as "substantial headwinds" cited by its top official could hinder the economy,

Seven of Canada's primary dealers—the institutions that deal directly with the central bank as it carries out monetary policy—have moved their target for the next Canadian rate hike further into the future since the last poll on May 31.

Scotia Capital boldly pushed their forecast from October—a view it has held since last fall—all the way into the second quarter of next year, while flagging the risk the central bank could move even later than that.

"Those who are arguing that the BoC is behind the curve are treating monetary policy as being conducted in a vacuum in isolation of myriad other complicated influences upon the economy and markets," Scotia economists Derek Holt and Karen Cordes Woods wrote in a note to clients.

They said some of those factors included a strong Canadian dollar strength, higher commodity prices that are crowding out wage growth and tighter mortgage lending rules.

The Reuters survey showed six dealers forecast the Bank of Canada will resume raising interest rates in September.

This was the same number of primary dealers that saw a September rate increase in the last dealer poll on May 31.

But it was partly the result of three dealers pushing back their rate hike forecast from July. Dealers now unanimously believe the Bank of Canada will keep its key policy rate unchanged at 1 percent at its July 19 policy announcement date.

Canada was the first Group of Seven country to raise interest rates following the global financial crisis, lifting its target for the overnight rate three times last year.

Five dealers left their forecasts unchanged from the last poll.

"We could have quite a number of important risks, so that suggests some moderation in raising rates," said Carlos Leitao, chief economist at Laurentian Bank Securities, which stuck to its forecast for a September rate hike.

"But rates need to go up, and I still think they will go up this fall."

Some dealers attributed their revisions to the Canadian economy's recent soft patch.

Analysts also cited recent remarks by Bank of Canada Governor Mark Carney and an uncertain global economic outlook for their shifts in view, rather than Wednesday's data that showed an unexpected spike in inflation.

Carney recently pointed to the U.S. economic slowdown and the strong Canadian dollar as major factors that could hinder Canada's economic expansion.

Still, many think a pickup in the economy later this year will prompt the bank to act.

"By October we will have enough information on the third quarter to demonstrate that the second quarter was a bump in the road, and the Bank of Canada will start the process of raising rates," said Avery Shenfeld, chief economist at CIBC.

Swaps markets have been steadily reducing bets on when the Bank of Canada might next raise interest rates this year to the point where no increases are fully priced in for 2011.

"That's way too exaggerated," said Laurentian's Leitao.

Earlier this month, TD Securities was the first dealer to push its rate hike forecast into 2012, putting it more in line with market expectations.

"We still see them hiking next in January. There's a slight risk if things do truly improve, that it could come a little bit later in 2011, but I think the base case is still prudence rules the day," said David Tulk, chief Canada macro strategist at TD Securities.

"A lot more can go wrong than can go right."
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