In a sharp turnaround from just last week, Canada's primary bond dealers now unanimously predict the Bank of Canada will leave its key overnight interest rate unchanged next week, according to a Reuters survey on Friday. All of Canada's 12 primary dealers now expect the central bank to keep its trendsetting overnight rate at 2.5 percent on December 7, its next policy decision date.
"I think it's a foregone conclusion," said senior economist Avery Shenfeld at CIBC World Markets, which maintained its forecast that there would be no rate hike on Tuesday.
The survey was conducted after figures on Friday showed Canadian job growth in November was well below expectations and Statistics Canada said the strong Canadian dollar was hurting the manufacturing sector. The Canadian dollar is up about 8 percent since mid September.
The results of Friday's survey mark a dramatic shift in sentiment from previous polls.
Just last week, dealers were nearly unanimous in predicting a 25 basis point rate increase, but clear signs that the strong Canadian dollar is beginning to eat into economic growth have prompted them rethink their expectations.
In poll conducted on Tuesday, after the release of soft third-quarter economic growth data, the dealers were split on a rate rise, with five calling for a 25 basis point hike, and five predicting no change in rates. Two did not participate in the last poll.
Merrill Lynch, which changed its view to a rate freeze from a rate hike, pointed to a combination of low inflation and bad statistics.
"The GDP report had a pretty ugly mix in terms of exports and inventories, which was bad for the medium-term outlook for industrial production. The trade side's only going to get worse, given the dollar's move, over the next couple of quarters," chief economist Robert Spector said.
He pointed out that the downward revisions for prior quarters for GDP "suggested that the output gap was a lot bigger than the Bank of Canada thought that it was."
"And then today's job numbers showing further pain from the Canadian dollar in the fourth quarter - because this is after all a November number - should give them plenty of latitude in an environment where there are virtually no inflation pressures to remain on the sidelines for at least December but I think beyond," he said.
The Bank of Canada has raised interest rates twice this year, most recently in October.
Some dealers now suggest the bank is unlikely to raise rates until after the first quarter of 2005.
A significant shift had already been under way in the Canadian bond market recently. Prices have risen sharply as market players price out rate hike expectations for the next few months.
The Canadian dollar edged to its lowest level in two weeks on Friday on the prospect that Canada's interest rate premium over the United States would narrow if the Bank of Canada stands pat for some time and the US Federal Reserve continues raising rates.