Analysts:BOC More Cautious, Likely To Hold Policy Rate at 1.0%

By Courtney Tower

     OTTAWA (MNI) - The former widespread expectation of a third Bank of Canada

policy rate hike this year recedes, with almost no analyst seeing an increase in

the 1.0% rate on Wednesday and the ranks diminishing of those who expect one at

the final setting for 2017, on December 6.

     Too many uncertainties, such as NAFTA negotiations that are going badly for

a trade-dependent economy, too many possible prospects that need time to

materialize, such as the effect on high household debt of new housing rules,

leave the Bank of Canada likely to maintain cautious monitoring of data and

events, analysts believe.

     "We expect no change from the Bank on Wednesday and we think it will signal

that it will wait a bit longer for any further hike because of the

uncertainties, particularly with regard to NAFTA and to new housing rules,"

Douglas Porter, chief BMO economist, told MNI.

     "Also, there is some evidence that the economy is losing momentum," Porter

added, citing for instance the disappointing fallback in August retail sales

reported last week. While a month's data does not necessarily make a trend, real

sales dropped by a large 0.7% and CIBC analyst Nick Exarhos sees it "suggesting

another sluggish month for output in August after July's flat reading."

     With third quarter output to pull back from stellar growth in the first

half of this year - +3.7% in the first quarter and +4.5% in the second, far

above BOC's projections - growth is cooling, as the BOC has expected. Analysts

see something like 3% or 3.1% growth for all of 2017, representing a drop down

to the 2% region for the third and fourth quarters, much as the BOC has

predicted.

     Wages have improved somewhat, overall, but price pressures in the economy

remain low. The 1.6% headline annual inflation reported by Statistics Canada

last Friday, the third monthly increase, stays below the 2.0% inflation target

held by the BOC. Core inflation remains low as well. There is no reason to worry

about pending inflationary overheating as yet, CIBC chief economist Avery

Shenfeld notes.

     Governor Stephen Poloz in a September 27 speech reiterated, with added

emphasis, that in the face of many uncertainties the BOC has become

"particularly data-dependent." His data includes, prominently, as he stressed in

that speech, business sentiment as expressed in the quarterly Business Outlook

Survey released last week.

     That outlook represented something of a pullback from the spring survey.

The Bank presented it as still positive, with businesses expecting higher future

sales, more hiring and more investment in plant and equipment, but nevertheless

a pullback.

     As well, there are the various uncertainties that call for a wait and see

attitude, Shenfeld says. For BOC's forecasting, "there's no variable in the

model for 'NAFTA ends,'" he told clients in a commentary. "There's no button for

'new mortgage rules.' There's (sic) no historical precedents that can be used to

confidently measure the growth and inflation impacts of a minimum wage hike as

large as the one Ontario is about to institute (from C$11.60 presently to $14

next January 1 and $15 January 1, 2019)."

     All of that necessary monitoring will mean no change in the 1.0% rate

"until the spring of 2018," Shenfeld says.

     "Given inflation below target and the economy operating close to capacity,

if there is further tightening it will be gradual," Paul Ferley, assistant chief

economist at RBC, told MNI. He sees it quite probable that there will be no hike

this year, perhaps not until sometime up to the end of next year.

     The Bank of Canada has evidently taken on "a more patient bias" of late,

following the two 25 basis point rate hikes earlier this year, and now is in a

"watch and wait mode," Jimmy Jean, senior economist for Mouvement Desjardins,

told MNI.

     "I think they want to assess how the housing market will handle the higher

interest rates that we have seen over the summer and may happen further with the

new 'stress test' rules for all future homebuyers to take effect next January

1," Jean said.

     Other economists see the new rule depressing housing demand by 5% to 10%

once implemented.

     "The economy has come a long way in improving this year," Jean said, "with

employment strong, wage rates starting to accelerate, business optimism

remaining constructive."

     "We are just now on a more sustainable path, and the BOC is likely to take

the time ahead to gain a better idea on where we are going," he added.

--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com

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