Bank of Canada seen raising rates in second quarter of 2015: Reuters poll

By Deepti Govind and Louise Egan

OTTAWA (Reuters) - The Bank of Canada is seen keeping interest rates on hold until well into 2015 as it waits for more signs of life from the U.S. economy and grapples with two big worries at home - low inflation and a hot housing market, a Reuters poll showed.

The median forecast in a Reuters poll of 32 economists published on Thursday was for the central bank to begin hiking rates from the current 1 percent level in the second quarter of 2015.

That is six months later than predicted in a poll last month, before central bank chief Stephen Poloz surprised markets by adopting a more dovish stance after 18 months of signaling rate hikes to come.

The day after that October 23 policy shift, Canada's 12 primary securities dealers likewise changed their forecasts to show a rate hike in the second quarter of 2015.

The central bank's next move hinges largely on events beyond Canada's borders, with the big question being whether the U.S. recovery will accelerate as hoped next year, economists said.

Domestically, the bank is forced to stand pat due to uncomfortably low inflation on the one hand and excessive levels of household debt on the other, linked to a housing boom. If it cuts rates to address the former, it risks stoking a credit bubble that could bring bigger problems down the road.

"They've got two worries and they balance each other out," said David Watt, chief economist at HSBC Bank Canada, adding strong auto sales to the equation, alongside housing.

"I won't say that they are hamstrung but I think that they're comfortable sitting on the sidelines at the present time ... their focus is going to remain on eventual rate hikes." he said. "It's just that when that occurs is further down the road than they might have thought several months ago."

The economists surveyed unanimously saw the bank holding rates unchanged at its next rate decision on December 4.

When asked for the percentage likelihood the bank might move rates next week, nine saw a slight chance it would lower rates, although the most extreme forecast put that probability at just 25 percent.

Canada's central bank was the first in the Group of Seven major economies to lift borrowing rates from rock-bottom levels following the global financial crisis as the economy pulled out of a shallow downturn relatively quickly.

Despite many warnings by Poloz's predecessor, Mark Carney, who now heads the Bank of England, that more rate hikes were coming, the bank has held its overnight lending target steady since September 2010.

Just five months after taking the helm in June, Poloz withdrew the hawkish language that characterized the end of the Carney era.

AHEAD OF THE FED

The reason for the policy shift was a disappointing performance by exports and business investment, which the bank had hoped would replace consumer spending as the drivers of growth, Poloz said.

David Tulk, economist with TD Securities, notes the fact that the U.S. Federal Reserve did not taper its bond purchasing program in September probably also convinced the Canadians of the dangers of withdrawing stimulus too far in advance of the Fed, including a stronger Canadian dollar that would continue to hurt struggling exporters.

"At this stage of the recovery where they need a lot of things to happen that are outside their control, namely a stronger U.S. economy, they're going to sound dovish as best they can because they would probably like, behind closed doors, to talk the currency lower," Tulk said.

Tulk is confident the United States will "muddle through" upcoming fiscal policy decisions and eventually gain a little more momentum over the next couple of years.

The Bank of Canada has also made clear it is paying more heed to inflation, which has been below its 2 percent target since May 2012 and dropped to a 0.7 percent annual rate in October.

The International Monetary Fund projected in a report on Wednesday that the Bank of Canada was unlikely to lift rates before early 2015.

The Reuters poll showed rates are expected to climb to 1.5 percent by the end of 2015.

The most hawkish forecast was for the first rate hike to come in the fourth quarter of 2014, a call made by three economists.

Only one forecaster saw the bank cutting rates between now and the end of 2015, predicting the rate would fall by 50 basis points by the end of 2014.

(Writing by Louise Egan; Editing by Dan Grebler)