Despite all the economic gloom lately, each of the 11 primary dealers polled by Reuters still predict a 1/4 point rate hike at the Bank of Canada's next interest rate meeting.
Here’s a look at their overnight rate predictions for each of the remaining BoC meetings this year. (Keep in mind, today’s overnight target rate is 0.75%.)
| Dealer | Sept 8 | Oct 19 | Dec 7 |
| BoA-Merrill Lynch | 1.00% | 1.00% | 1.00% |
| BMO Capital Mkts | 1.00% | 1.00% | 1.00% |
| Casgrain & Co Ltd | 1.00% | 1.25% | 1.25% |
| CIBC World Mkts | 1.00% | 1.00% | 1.00% |
| Deutsche Bank Sec. | 1.00% | 1.00% | 1.25% |
| Desjardins Securities | 1.00% | 1.25% | 1.50% |
| Laurentian Bank Sec. | 1.00% | 1.00% | 1.00% |
| National Bank | 1.00% | 1.25% | 1.50% |
| RBC Capital Mkts | 1.00% | 1.00% | 1.25% |
| Scotia Capital | 1.00% | 1.00% | 1.00% |
| TD Bank | 1.00% | 1.00% | 1.25% |
|
Mean Average |
1.00% | 1.07% | 1.18% |
All this consensus among dealers isn’t swaying overnight index swap (OIS) traders, however. OIS traders are currently pegging the odds of a September 1/4 point rate hike at just 39%.
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Source: Reuters 3000; Poll date: Friday August 20, 2010
would be nice to know who is (more) right: The forecast of primary dealers or the wisdom of users of capital i.e. the OIS traders…
any thoughts?
takloo, they’re both wrong. Early this year the forecasts were much higher and they were right; now they’re lower and they’re still right because everyone knows what’s happening in Europe now. And that’s just one big event – every week new information comes out that changes the rate pressure. The chances that the reasoning behind these forecasts will stay the same until all of them come to pass is extremely small.
Traders may include some people who know things that affect the prices but haven’t been publicized yet, but then again that effect could be overwhelmed by much larger traders who don’t have that information. In theory it’s a better place to look but the market only reflects the participants and we don’t even know who they are let alone what their past record is.
Normally I’d put my money on the people who have something to lose (traders). On the other hand, 11 out of 11 dealers is quite a consensus.
Maybe we should average the two probabilities:
39% + 100% / 2 = 69.5% chance of a rate increase
When interest rate is too low, economic opportunity cost is negligible. That’s why business investment and hiring decisions are deferred without too much cost. No growth in employment means no growth in consumption, while consumers are tapped out! Rate must continue to go up to arrive at a sustainable balance, although rate increases will be moderated by the sluggish economies and other problems around the world. Low inflation only means BoC does not have to hurry; that’s all! Look at what has happened to Japan in the ’90s when they continued to pursue a low interest rate monetary policy. The Japanese economic still has not recovered. It;s simple macro-economics.