No Rate Change
Frank Pingue And Ka Yan Ng, Reuters, With Files From Financial Post
The Bank of Canada will stick to its conditional pledge to keep its benchmark interest rate at its current near-zero level through the second quarter of next year, most Canadian primary securities dealers say.
Eight of Canada's 12 primary dealers polled by Reuters predicted the slow pace of economic recovery will prevent the Bank of Canada from lifting its key interest rate above the current level of 0.25%, a historic low, until after the first half of 2010.
"Given the state of the economy and the fact that we expect the recovery to be very mediocre and modest, there is really no need to tighten any earlier than that," said Carlos Leitao, chief economist at Laurentian Bank Securities in Montreal.
"In the meantime, particularly the rest of this year, the downside risks are still quite significant, so I don't see any reason for the bank to hurry up and move rates."
The central bank will announce its next rate decision Tuesday, though the result is largely a foregone conclusion because of its April pledge.
All the dealers polled said the bank will leave its key rate steady for the rest of this year, but there was little consensus on when it will next raise rates.
The forecast for the earliest rate hike was the first quarter of 2010. The forecast for the latest move is that it will not come before 2011.
After nine straight months of contraction in the Canadian economy, some dealers said gross domestic product will show signs of improvement in the last half of 2009 and translate into higher interest rates early in 2010.
"We think that during the second half of the year we will get positive GDP growth both in the U. S. and Canada and so in fact we're getting closer to the turning point as far as the recession is concerned," said Paul-Andre Pinsonnault, senior fixed-income economist at National Bank Financial in Montreal.
"Six months down the road ... by that time there will be enough signs that the economy is on a sustainable growth path, and so the bank will have to revise their commitment to keeping the interest rate at a quarter per cent."
The dealers also saw a low probability that the bank would engage in some form of quantitative easing -- printing money to buy market securities -- over the next 12 months. The median expectation of the probability of quantitative easing was 10%.
The poll was conducted after data showed Canadian consumer prices had their first annual fall since November 1994, posting their biggest downward turn in more than half a century.
Meanwhile, something that could shed light on whether Canada is on the way to economic recovery will be May's retail sales numbers, to be released on Wednesday.
Sal Guatieri, senior economist with BMO Capital Markets, said he's expecting a 0.7% monthly gain in retail sales. That would be an improvement from the 0.8% decline for April, which followed three straight monthly gains.
Mr. Guatieri said part of that sales boost will result from higher gasoline prices, but there are other factors as well.
"We know that new motor-vehicle sales were up in May about 1%," he said. "It looks like consumers have turned the corner after retrenching at the turn of the year. They're still far away from a spending spree, but it looks like they're starting to spend a little more freely now."
Millan Mulraine, economics strategist for TD Securities, went so far as to predict a 1.5% gain in retail sales. Beside higher gasoline prices and more car sales, he reasoned that household-related items have been selling better, given the recent strength of home sales.
Also in the coming week, Statistics Canada will release May's wholesale trade numbers today, and several companies such as Shoppers Drug Mart, Suncor Energy, EnCana and Loblaw will be providing quarterly financial results in the days that follow.
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