Canada primary dealers split on next Bank of Canada rate move

TORONTO (Reuters) - Canadian primary dealers were split on the direction of the next interest rate move by the Bank of Canada, according to a Reuters poll published on Thursday, after the central bank surprised many traders by deciding not to cut a day earlier.

The Bank of Canada left its benchmark interest rate on hold at 0.50 percent on Wednesday, but admitted it was not an easy call, as concern about a rapid decline in the currency clashed with an economic slump.

Many forecasters had thought the central bank would cut rates further to combat a deep oil price shock and a widening in credit spreads amid financial market turmoil at the start of 2016. The decision followed two 25 basis point cuts in 2015 as the economy contracted in each of the first two quarters.

But others wondered how much difference it would make.

"The impact of a cut diminishes as the overnight rate gets lower," said Andrew Kelvin, senior rates strategist at TD Securities.

Five of Canada's eleven primary dealers expect a rate cut, with four projecting the central bank will move in 2016 and one expecting it to hold off until 2017. Meanwhile, five expect the next rate move to be a hike. One has the central bank on hold throughout its forecast horizon.

The Bank of Canada has yet to incorporate expected fiscal stimulus into its projections. That suggests to some dealers that the central bank will wait until the federal budget is tabled before any move on rates, keeping the central bank sidelined in March.

"I would expect them to keep the powder dry in the event that things really sharply deteriorate," said Derek Holt, an economist at Scotiabank.

At Royal Bank of Canada, the expectation is that reorientation of the economy towards exports will allow the central bank to hold off from cutting further. It expects the next move to be a hike, in the first quarter of 2017.

"We've seen a massive depreciation of the Canadian dollar, and normally that provides a good lift for exports," said Paul Ferley, assistant chief economist at Royal Bank of Canada.

PRIMARY DEALER NEXT MOVE WHEN END 2016

BofA-MERRILL LYNCH N/A - 0.50

BMO CAPITAL MARKETS CUT Apr 2016 -

CASGRAIN & CO CUT Q2 2016 0.25

CIBC HIKE Q3 2017 0.50

DESJARDINS SECURITIES HIKE Q4 2017 0.50

HSBC SECURITIES CUT Mar 2016 0.25

LAURENTIAN BANK CUT Q3 2016 0.25

NATIONAL BANK HIKE Q4 2017 0.50

RBC CAPITAL MARKETS HIKE Q1 2017 0.50

SCOTIA CAPITAL CUT 2017 0.50

TORONTO-DOMINION BANK HIKE Q1 2018 0.50

MEDIAN - 0.50

(Additional reporting and polling by Alastair Sharp in Toronto; Editing by Meredith Mazzilli)

By Fergal Smith and Anu Bararia