Bank of Canada Expected to Maintain Rate

By Paul Vieira Features Dow Jones Newswires

After the Bank of Canada raised its benchmark interest rate for the first time in seven years in July, economists expect it to maintain the rate Wednesday but keep the door open to gradual rises in coming months.

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The majority of economists from the 11 primary dealers of Canadian government securities in a Wall Street Journal survey predicted the Bank of Canada would keep its main lending rate at 0.75% in its scheduled policy decision.

The economy continues to defy expectations, with the gross domestic product expanding 4.5% annualized in the second quarter, or the fastest pace of quarterly growth since 2011 and capping off the best 12-month run for Canada in the postcrisis era. Economists at two primary dealers forecast a rate rise Wednesday based on the strength of that GDP report.

Still, eight market watchers contend Bank of Canada Gov. Stephen Poloz will choose to stay put, for various reasons. They say Mr. Poloz has the luxury to wait, noting inflation remains tepid and far off from its 2% target. The central bank might also want to gauge market reaction to Federal Reserve plans to shrink its balance sheet; and contain any further upward move in the value of the Canadian dollar, which would weigh on export growth.

"Back-to-back quarter-percentage point hikes could raise anxiety among investors and Canadians looking to make key economic decisions," said Sebastien Lavoie, economist at Laurentian Bank Securities in Montreal. "Taking a pause in September would also foster the markets' expectations of a very gradual hiking process."

Of the eight economists who said the Bank of Canada would stand pat Wednesday, six said they expected Mr. Poloz and company to raise rates in October, lifting the benchmark rate to 1%. Ten of the 11 primary dealers participated in the survey.

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In July, the Bank of Canada said the economy no longer required rock-bottom interest rates to power growth, as the improving economy had soaked up unused labor and production capacity at a "significant" pace.

Canada and the other major global economies are growing in sync, bolstered by accommodative monetary policy and the gradual fading of crises in the U.S. and Europe. Among developed-world economies, Canada has posted the fastest growth by a wide margin, expanding 3.7% for the one-year period ending June 30.

The blockbuster second-quarter report prompted economists at Bank of Nova Scotia and Canadian Imperial Bank of Commerce to change their minds about Wednesday's rate decision. After initially forecasting no change, they suggested Mr. Poloz would raise rates again.

"The economy has surpassed everyone's expectations by leaps and bounds," said Derek Holt, economist at Bank of Nova Scotia. "Spare capacity is shut and the economy is tripping into excess aggregate demand. There is no need for emergency life support -- if there ever was."

Even those who believe the Bank of Canada stays on hold acknowledge it 's a close call. "We still lean to no-move just yet, but no one would be shocked if the bank did pull the trigger early," said Doug Porter, chief economist at BMO Capital Markets.

Write to Paul Vieira at paul.vieira@wsj.com

(END) Dow Jones Newswires

September 05, 2017 07:55 ET (11:55 GMT)