Investors slash Bank of Canada rate hike bets as Poloz frets on oil

Expectations for more interest rate hikes in Canada tumbled on Thursday after Bank of Canada Governor Stephen Poloz said the central bank would need to assess the impact of lower oil prices and as a new threat emerged to U.S.-China trade relations.

Chances of an interest rate hike at the Bank of Canada's next meeting in January slumped to 10 percent from about 60 percent before an interest announcement on Wednesday, when the central bank left its benchmark interest rate on hold at 1.75 percent and was more dovish than some investors expected.

On Thursday, Poloz said the central bank would need to understand the macroeconomic effects of what is happening in oil markets before it could consider a rate hike in January. He was speaking to reporters following a speech in Toronto. Oil is one of Canada's main exports.

"He didn't write off January but it is not necessary at this stage," said Hosen Marjaee, senior managing director, Canadian fixed income at Manulife Asset Management.

The market is indicating that the central bank will not hike until April at the earliest because the sell-off in risk assets has already tightened financial conditions, Marjaee said.

The S&P 500 and the Dow Jones Industrial Average slipped back into losses for the year and credit spreads widened on mounting worries of slowing global growth, after Canada arrested Chinese smartphone maker Huawei Technologies Co Ltd's chief financial officer for extradition to the United States. The arrest cast fresh doubts over the prospect of Beijing and Washington striking a deal on trade tariffs in their 90-day truce period.

Poloz repeated that more tightening would be needed to keep inflation on track but added the pace would be decidedly data-dependent.

"It is fair to say that the data released since our October Monetary Policy Report have been on the disappointing side … the economy has less momentum going into the fourth quarter than we believed it would," Poloz said.

Much of the bank's discussion ahead of the interest rate announcement on Wednesday had been focused on oil, he said. Prices for crude, are sinking amid a supply glut and this is hurting Alberta, the western province which is home to the domestic industry.

"It is already clear that a painful adjustment is developing for Western Canada and there will be a meaningful impact on the Canadian macroeconomy," said Poloz.

The sector could suffer further harm if trade tensions between the United States and China cut demand, he added.

A slump in oil prices badly hit the economy in 2015, and the damage this time round should be less on a dollar-for-dollar basis, Poloz said, given consolidation in the energy sector since 2014.

(Reporting by Fergal Smith and Denny Thomas, writing by David Ljunggren; Editing by Bernadette Baum and Tom Brown)