The Bank of Canada will raise its key overnight interest rate next week, but the pace of subsequent hikes is less clear, according to Canadian primary dealers and global forecasters surveyed by Reuters.
The Reuters poll, released on Wednesday, showed a 73% median probability that the Bank of Canada will raise the overnight rate by 25 basis points, to 0.75% from the current 0.50%, at its next policy announcement date on July 20.
More than half of 42 forecasters surveyed say the central bank will not take every subsequent opportunity this year to raise rates by a quarter point, but will pause to gauge the pace of global economic recovery. Fears of a double-dip recession, Europe's debt troubles and patchy U.S. economic data have weighed on markets in recent months.
"We think the bank is certainly justified to raise rates at the next two announcement dates because of a strong economy," said Sal Guatieri, senior economist at BMO Capital Markets.
"We think by later this year the bank will want to sit back and assess the impact of earlier rate increases, as well as, and perhaps more importantly, the developments in Europe and the U.S."
The results of the global poll are a touch more bearish than the previous Reuters poll, in May, in which respondents saw the key rate at between 1% and 1.75% at yearend.
Forecasts of the overnight rate at yearend now range between 0.75% and 1.50%. By the end of 2011, market experts put the key rate between 1.5% and 3.5%.
Nearly all who did not predict a rate rise in July said the next one would be delivered in September.
In June, the Bank of Canada became the first central bank in a Group of Seven industrialized nation to hike interest rates from the emergency low levels put into effect during the financial crisis. It has since warned that the market should not count on a sustained run of rate increases, saying several times that the path of monetary policy is not preordained.
Still, a better tone to recent Canadian data, particularly with a blockbuster job gain in June, has lifted market expectations that rates are going up.
"The broad improvement in the labor market and steady pace of growth are supportive of more BoC hikes this year," said Yilin Nie and David Cho, economists at Morgan Stanley.
Yields on overnight index swaps, which trade based on expectations for the central bank's key policy rate, suggest about a 90% chance of a rate hike on July 20.
That compares with less than 50% chance just a few weeks ago, when second-quarter data showed some cracks in Canada's economic armor after it posted a remarkable 6.1% economic growth rate in the first quarter.
The results of Wednesday's survey are broadly in line with a Reuters poll last week of Canada's 12 primary securities dealers -- the institutions that deal directly with the central bank to help it carry out monetary policy -- in which all predicted quarter-point rate hikes this month and again in September.
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