UPDATE 1-Canada dealers hold to June rate hike call

* Primary dealers maintain forecasts that June rate likely

* Faster-than-expected recovery in Canada argues for hikes

* European debt crisis key risk to interest rate outlook
(Updates with commentary, details)

By Ka Yan Ng and Claire Sibonney

TORONTO, May 7 (BestGrowthStock) – All of Canada’s primary
securities dealers expect the Bank of Canada to start raising
interest rates in June as the economy roars ahead, even as
Europe’s fiscal crisis weighs down the global outlook.

In a poll conducted after Canadian employment figures
posted a record gain in April of 108,700 jobs, beating
expectations four-fold, all 12 dealers said the central bank
would push interests 25 basis points higher from the current
ultralow 0.25 percent. [ID:nN0793308]

One dealer, RBC Capital Markets, added its voice to the
June rate hike camp to bring it to a unanimous call, after
nearly all primary dealers forecast a June rate hike last month
after the Bank of Canada dropped its conditional pledge to hold
rates steady. [ID:nN20111938]

“It’s really based on the fact that we are seeing such
strong momentum in the economy. We have increased our first
quarter GDP forecast to now be 5.5 percent,” said Dawn
Desjardins, assistant chief economist at Royal Bank of Canada,
noting the “whopper” of a jobs report on Friday.

Others said that rates must rise from levels more
appropriate for emergencies.

“What they’re doing is essentially removing gradually some
of the emergency rate relief that was provided over the last
couple years and trying to move gradually back towards a bit
more of a normal setting for policy,” said Scotia Capital
economist Adrienne Warren.

But many said they would put a “massive asterisk” beside
their forecasts given Greece’s situation and concern that its
debt crisis could widen to other euro zone countries, as well
as worries about volatile financial markets.

Central bank rate hike expectations, reflected in yields on
overnight index swaps, have been reduced dramatically on
sovereign debt risk in Europe. (BOCWATCH: )

“Nothing is locked in here. The situation is incredibly
fluid. I think the economy suggests there is no debate but the
financial markets suggest arguably there’s no debate the other
way. We have three weeks to settle this issue,” said Doug
Porter, deputy chief economist at BMO Capital Markets.

“We’re standing an ice floe here that’s moving around
pretty quickly.”

If the bank does raise interest rates in June, it would
become the first G7 central bank willing to unwind emergency
stimulus measures as the economy emerges from recession.

All dealers see rates rising at least 25 basis points in
both July and September as well.

Some dealers see a strong chance the bank could make larger
hikes of 50 basis points, given the strength of the recovery
and the possibility that the U.S. Federal Reserve also starts
raising interest rates.

“We think that with the revision that the Bank of Canada
has made on their GDP forecast and the fact that the output gap
will be closed at least one quarter earlier than what was
thought previously, the bank needs to get closer (to) a more
neutral rate a little bit faster than we were pricing in
before,” said Paul-Andre Pinsonnault, senior fixed-income
economist, at National Bank Financial.

Dealers predicted the year end overnight rate would range
between 1.25 to 2.00 percent.

COMPANY JUNE JULY SEPT

ACTION ACTION ACTION

BOA-MERRILL LYNCH UP 25 UP 25 UP 25

BMO CAPITAL MARKETS UP 25 UP 25 UP 25

CASGRAIN & CO LTD UP 25 UP 25 UP 25

CIBC WORLD MARKETS INC. UP 25 UP 25 UP 25

DESJARDINS SECURITIES UP 25 UP 25 UP 25

DEUTSCHE BANK SECURITIES LTD UP 25 UP 25 UP 25

HSBC SECURITIES UP 25 UP 25 UP 25

LAURENTIAN BANK SECURITIES UP 25 UP 50 UP 50

NATIONAL BANK UP 25 UP 25 UP 50

RBC CAPITAL MARKETS UP 25 UP 25 UP 25

SCOTIA CAPITAL INC. UP 25 UP 25 UP 25

TORONTO-DOMINION BANK UP 25 UP 25 UP 25

Where do you think the bank’s key policy rate, now at 0.25
percent, will be at the end of 2010?

BOA MERRILL LYNCH 1.50 PCT

BMO CAPITAL MARKETS 1.50 PCT

CASGRAIN & CO LTD 1.50 PCT

CIBC WORLD MARKETS INC. 1.25 PCT

DESJARDINS SECURITIES 1.50 PCT

DEUTSCHE BANK SECURITIES 1.50 PCT

HSBC SECURITIES 1.50 PCT

LAURENTIAN BANK SECURITIES 2.00 PCT

NATIONAL BANK 1.75 PCT

RBC CAPITAL MARKETS 1.50 PCT

SCOTIA CAPITAL INC. 1.50 PCT

TORONTO-DOMINION BANK 1.50 PCT

Stock Market Research

(Reporting by Ka Yan Ng and Claire Sibonney; Editing by
Jeffrey Hodgson)

UPDATE 1-Canada dealers hold to June rate hike call