Canada rate-hike conviction withers, hike not seen till at least April: Reuters poll

By Mumal Rathore BENGALURU (Reuters) - Canada's economy is clawing its way through a soft patch, which will delay the next interest rate rise until at least April, according to economists polled by Reuters who said they were less confident about the Bank of Canada's rate hike path this year. Planned reductions in oil production, one of Canada's top export industries, are mainly responsible for a sharp cut in growth forecasts for the quarter through December and the first three months of the year, compared with an October survey. But a strong majority of respondents in the latest Reuters poll who answered an additional question, 15 of 24, also said their conviction about future interest rate rises had wilted since the last meeting. The survey was taken Jan. 14-17. That follows hints from policymakers that there is no pre-determined path for rates. It also coincides with an abrupt change in U.S. Federal Reserve rate guidance after a tumultuous period for financial markets around the turn of the year. The Bank of Canada still wants to get the 1.75 percent overnight rate closer to a "neutral" range - where it is no longer providing stimulus - which it estimates to start around 2.50 percent. But core inflation, which it targets, is quiescent and right around where it wants it to be, at 1.9 percent. It's expected to average just 2.0 percent this year and next. "The Fed's on hold, and Canada and the U.S. really don't have any meaningful inflation pressure. There is just no rush for the Bank to be really more aggressive with rates and that's what they have signaled," said Benjamin Reitzes, Canadian rates and macro strategist at BMO Capital Markets. Inflation is tame in Canada despite a hot job market that is not expected to cool any time soon. Economists are puzzled, as they are elsewhere, as to why the lowest unemployment in more than 40 years is not generating much upward wage pressure. In the first quarter, growth is expected to slow to a seasonally adjusted annualized rate of 1.3 percent from 1.6 percent last quarter. Those are downgraded from 2.0 percent and 2.2 percent, respectively, in October's poll. The range of growth forecasts in the latest poll has moved downward, with lower lows compared with October. That is largely due to oil production cuts late last year - and one ordered by the province of Alberta that started this month - amid a plunge in the price of oil and a big discount on Canadian crude versus its U.S. counterpart. But growth is expected to bounce back to 2.1 percent in the second quarter and hold around 1.9-2.0 percent through to the middle of next year. Indeed, most economists say the overall outlook for Canada's economy in 2019 hasn't changed dramatically, but there are several risks. "Given how late we are in the economic cycle, these risks are naturally more tilted to the downside than the upside," noted Jean-François Perrault, chief economist at Scotiabank. "The dominant negative risk continues to be an escalation of the U.S.-China trade war. Current signs point to our long assumed détente on this front, but as with all things related to President (Donald) Trump, there are always risks that things get out of hand." Still, there are upsides too. Economists say population growth is expected to be robust - thanks to strong immigration even as some of Canada's peers seek to curtail it - helping to boost the economy this year. Either way, the BoC will not reach the bottom end of the neutral range any time soon, according to the poll. The overnight rate will climb twice more, reaching 2.25 percent by year-end and will stay there through at least mid-2020. Financial markets are pricing in just a roughly 50 percent probability of one interest rate rise this year. Most economists say that is too dovish, but the lack of conviction around future rate rises is clear. "If the Fed does not hike in March then we think the BoC will not raise rates either," said Christian Lawrence, senior market strategist at Rabobank. "Indeed, we see the first half of this year as the BoC's only window to tighten, and where rates are as we head into the second half of the year will likely mark the terminal level for the Canadian policy rate. In other words, the terminal rate for Canada will likely be well below neutral." (Reporting by Mumal Rathore and Sumanto Mondal; Writing by Ross Finley; Editing by Bernadette Baum)