Bank of Canada likely to keep interest rates unchanged until 2018 - poll

September 1, 2016 11:02 AM EDT

A man is reflected in a window while walking past the Bank of Canada office in Ottawa, Ontario, Canada, May 25, 2016. REUTERS/Chris Wattie

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By Leah Schnurr and Anu Bararia

(Reuters) - The Bank of Canada will likely keep interest rates unchanged for even longer than had been anticipated as a lack of momentum in the economy has prompted analysts to push further their expectations for a hike to 2018, a Reuters poll found.

The central bank is unanimously expected to hold rates at 0.50 percent when it makes its next policy announcement Sept. 7.

According to the median forecast of 35 economists, the central bank is now likely to wait until the first quarter of 2018 before hiking rates to 0.75 percent. It had earlier been forecast in a July poll to raise rates in the final quarter of 2017.

Canada, a major oil exporter, was hit by the slump in crude prices last year and its economy has struggled to sustainably regain momentum since it was in a brief recession in 2015.

Wildfires in northern Alberta dealt another blow to growth this year, leading the economy to shrink in the second quarter at the steepest rate since the global financial crisis.

The Bank of Canada is hopeful that the headwinds Canada faces are temporary and that stronger demand from the United States and a lower Canadian dollar will help revive Canada's export sector.

But until that happens, the central bank is likely to stand pat on monetary policy, economists said.

A separate Reuters poll of foreign exchange strategists on Thursday forecast the Canadian dollar to broadly hold its ground against the U.S. dollar.

"We expect the Bank of Canada to keep its accommodative stance through 2017, and maybe beyond that, in order to facilitate the slow recovery that is the long adjustment to low commodity prices and a lower currency," said Sebastien Lavoie, economist at Laurentian Bank of Canada.

The central bank cut rates twice last year to offset the impact of weak oil prices. Analysts still say there's a 30 percent probability that the next move from the Bank of Canada will be a rate cut.

"We think that the economy still lacks momentum and that a further cut in interest rates could bolster the impact of fiscal policy," said David Watt, chief economist at HSBC Canada, who is forecasting a cut in the fourth quarter of this year.

While another rate cut could further fuel Canada's hot housing market, additional tightening measures by the government or other regulators are widely expected to be more effective at addressing fears that the market poses a risk to the financial system.

Economists had mixed views on how successful non-energy exports will be in leading economic growth in Canada this year, something the central bank is looking for. Eleven respondents were confident they would be, while nine said they would not.

"While not discounting that non-energy exports have increased, we don't see sufficient momentum for them to be a key driver of GDP growth," said Watt.

The poll also showed the Bank of Canada will keep its inflation target at 2 percent when it renews its inflation-control agreement with the government later this year.

Inflation is at the lower end of the central bank's 1 to 3 percent range, but core inflation, which strips out transitory price volatility and is the Bank of Canada's preferred measure, remains around 2 percent. The bank has said both measures are being influenced by temporary factors.

"The Bank of Canada is nailing its inflation target - its problems are economic growth and financial stability," said Bill Adams, senior international economist at PNC Financial Services Group.

(Polling by Anu Bararia and Krishna Eluri; Editing by Ross Finley and Bernadette Baum)

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