Doesn’t look like interest rates will rise this year

Bank of Canada Governor Stephen Poloz will remain in interest-rate hibernation for another year as plunging oil prices raise concerns the nation’s economic growth is in jeopardy, economists say.

Poloz, who delivers the central bank’s next rate decision tomorrow, will hold off raising borrowing costs until 2016, according to the median forecast in a Bloomberg monthly survey, which previously predicted the governor would lift rates later this year. Economists also cut two-year yield forecasts by the most on record.

The central bank hasn’t raised its benchmark interest rate since 2010 as it awaits an economic recovery that’s in danger of fading. Crude oil, Canada’s biggest export, is trading below $50 a barrel, from $107 in the summer. The slump is already crimping exports, weakening investment and playing havoc with prairie housing markets. The last thing the economy needs is higher interest rates.

“Markets are doing the dirty work for the Bank of Canada,” Emanuella Enenajor, senior Canada economist at Bank of America, said Jan. 15 by phone from New York. “We are still going to see the Bank of Canada holding on to their assertion that the recovery is proceeding, perhaps it’s just proceeding a bit slower than they thought.”

“They are definitely going to have to acknowledge that there is a large downside risk from falling oil prices,” in the new economic forecast, Enenajor said. Last week she pushed her rate-increase forecast to the third quarter of 2016 from the first quarter.

The Bank of Canada has kept its benchmark rate at 1 percent since September 2010, predating Poloz taking the governor job, and is the longest stretch since World War II.

Bets are increasing that Poloz will cut rates, rather than raise them, with swaps trading signaling about a one in three chance of a reduction to 0.75 percent by December.

Homes sales in the nation’s oil hub – Calgary – and Alberta’s largest city plummeted 24.6 percent in December from the previous month, the Canadian Real Estate Association said last week. That was the worst drop since the 2008 bankruptcy of Lehman Brothers Holdings Inc. sparked the global credit crunch.

Source (edited): Greg Quinn and Catarina Saraiva, Bloomberg News

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