As Bank of Canada quells sub-zero rates talk, next move may be a hike in 2022

By Fergal Smith
TORONTO (Reuters) - Investors looking beyond the COVID 19 pandemic are betting that the Bank of Canada will be one of the first major central banks to raise rates, signaling the success of the new governor Tiff Macklem, who has Market convinced no negative expectations expected prices.
Money market data shows that investors have turned their backs from pricing for additional easing by the Bank of Canada and instead see a stable rate profile for this and next year with a probability of around 50% for a rate hike in 2022. <BOCWATCH>.
The Federal Reserve, which has been pressured by President Donald Trump to lower interest rates below zero, is unlikely to rise from the money markets until at least 2023.
"The Bank of Canada has done a better job than some other central banks in suppressing speculation about further rate cuts," said Andrew Kelvin, chief strategist for Canada at TD Securities.
"If you think the economy bottomed out in April, a rate hike in two years is a plausible result, I think," said Kelvin.
After the Bank of Canada cut interest rates to a record low of 0.25% in March, there was speculation that it would set rates below zero along with central banks in Japan and Europe.
The Canadian dollar collapsed just last month when some investors exposed Macklem's comment on the day he was appointed governor as negative interest rates on the table.
Interest rates below zero lower borrowing costs and could help exporters should the Canadian dollar fall, but they also affect credit margins for banks and punish savers.
Some economists argue that experience in Europe and Japan shows that negative interest rates are not an effective stimulus for economic growth. Alternatives for the Bank of Canada if it needs to give additional impetus include increasing the size of its bond purchase program.
Both Macklem and his predecessor Stephen Poloz have stated that they see 0.25% as an interest rate floor. That could have triggered some potential headaches.
If negative rates were "priced in and the BoC would not meet market expectations, the BoC would disappoint the markets," said Greg Anderson, global leader of FX strategy at BMO Capital Markets. It would "probably trigger a stock decline and a CAD rally in a really bad moment."
Money markets could also signal confidence that adequate fiscal and monetary stimulus has been put in place to support the recovery of the Canadian economy, TD's Kelvin said, adding that the BoC does not want to encourage excessive borrowing from already highly indebted Canadians.
"I wouldn't be surprised if the Bank of Canada (like other central banks) were a little more eager to get out of the emergency rate if they were able to," said Kelvin.

(Reporting by Fergal Smith; editing by Denny Thomas and Tom Brown)
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