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Bank of Canada seen raising rates in Q2 2012

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The Bank of Canada will keep interest rates on hold until at least the second quarter of next year as global monetary policy stays accommodative due to slow growth, according to a Reuters survey released on Wednesday.

The Reuters poll of 43 economists and strategists showed the median forecast for the next rate hike was pushed back from the fourth-quarter of 2011 projected in a July poll.

Of the 33 forecasters who contributed to both polls, 30 pushed back their forecasts or are looking for less of a hike.

Many of the forecasters revised their calls after the U.S. Federal Reserve vowed to keep rates near zero until mid-2013 in its August 9 policy statement, and after Governor Mark Carney described a raft of global risks in parliamentary testimony on August 19.

"It's difficult to imagine a central bank like the Bank of Canada that operates within a mid-sized price-taking economy that is so attached to stumbling U.S. fortunes being able to buck this trend," said Derek Holt, economist at Scotia Capital.

Scotia pushed back its forecast for the next rate increase from the second quarter of 2012 until the third quarter, and warned a hike could come even later as the bank faces a real possibility of coming in below its inflation target throughout the forecast horizon.

Mazen Issa, Canada macro strategist at TD Securities, which in June became the first Canadian primary dealer to push its rate-hike forecast into next year, concurred that "the policy elastic" between the Bank of Canada and the Fed is a big consideration, despite the fact that Canada runs an independent monetary policy.

The other major considerations for the Bank of Canada are U.S. efforts to control its budget deficit and peripheral euro zone debt problems that continue to haunt the region.

END-OF-YEAR FORECASTS DEFLATE, MARKET SEES CUT

Forecasts for the end of 2012 have also shifted dramatically, from a median target of 2.5 percent in the July poll to 1.75 percent in the current survey.

Despite toning down their targets, however, none of the respondents predicted a rate cut, a divergence from overnight index swaps which have been pricing in a drop for some time.

"Markets are putting in a higher probability of easing in the face of weaker growth in the U.S.," said Paul Ferley, deputy chief economist at Royal Bank of Canada.

"It raises the probability that rates could be cut, but I think from an economist's point of view, there are reasons to expect growth to bounce back in the second half of the year."

Data on Wednesday showed the Canadian economy shrank in the second quarter, the first quarterly fall since the 2008-09 recession, largely due to temporary factors such as Japan's earthquake and tsunami.

There has been no shortage of troubling signs in U.S. economic reports as well. Reports on Tuesday showed plunging U.S. consumer confidence and still-anemic home prices, while investors are raising bets that the Fed may still come up with more economic stimulus.

"We've seen a weakening in near-term momentum and that's probably the primary reason that could keep the Bank of Canada on hold for some time," said Ryan Wang, economist for HSBC.

Primary dealers HSBC Securities and Desjardins Securities have both pushed back their forecasts for the next hike until at least 2013.

The poll showed a 95 percent probability there won't be a change in rates at the next scheduled policy announcement on September 7.

The survey was conducted between August 25-30.

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