OTTAWA, April 12 (Reuters) - The Bank of Canada on Wednesday is expected to keep rates on hold as inflation cools and because of stress in the global banking system, despite the fact that growth accelerated in the first quarter, analysts said.
Last month the Bank of Canada became the world's first major central bank to pause its tightening campaign, leaving its benchmark rate at 4.50%. Governor Tiff Macklem said he wanted to let the eight previous rate hikes sink in and would hold of on further increases as long as inflation came down as forecast.
Inflation has been edging down, reaching 5.2% in February after peaking at 8.1%, but growth at the start of the year has vastly outpaced the bank's expectations. However, bank failures in the United States and Europe have put central bankers on guard against a widespread credit crunch.
"Having led the way to the sidelines, the widespread view is that the global banking sector strains will have locked (the Bank of Canada) there," said Doug Porter, chief economist at BMO Capital Markets, in a note.
All 33 economists polled by Reuters agree that the Bank of Canada (BoC) will hold its key overnight rate steady. Money markets are betting that the central bank's next move will be a cut.
The BoC will also release its monetary policy report with new forecasts on Wednesday. In January, the bank forecast 0.5% annualized growth in the first quarter, but most analysts now expect it to be about 2.5% after flatlining in the fourth quarter of last year.
"Were it not for banking sector turmoil, central bankers might have seen enough evidence to raise rates again," said Royce Mendes, head of macro strategy at Desjardins Group, in a note. The BoC will continue to warn that more hikes are possible, he said.
Last month, Deputy Governor Toni Gravelle said the BoC was "ready to act in the event of severe market-wide stress" in the financial system while adding that currently Canada is nowhere near that point.
That said, hedge fund bets against Canada's TD Bank Group last week hit $4.2 billion, making it the most-shorted banking stock globally, according to data provider ORTEX's calculations, with some analysts concerned about the bank's exposure to U.S. regional lenders.
"Hiking in this environment would put markets on high alert," said Jay Zhao-Murray, FX Market Analyst at Monex Canada, in a note.
Still, Canada's rapid population growth could lead to the BoC raising its estimate of the neutral interest rate from its current setting of a range between 2% and 3%, say analysts.
The neutral rate is the level at which monetary policy is neither stimulating nor slowing the economy, so increasing the estimate could indicate that the central bank expects rates to eventually settle at a higher level than previously thought.
