Analysts: BOC To Raise Rate Wednesday, Next Stages Unsure

By Courtney Tower

     OTTAWA (MNI) - The Bank of Canada is likely to raise its policy interest

rate 25 bps to 1.25% on Wednesday, analysts said, but they differ on the pace

and scope of tightening for the rest of 2018 and beyond.

     The issue is the conflict seen between strong employment and an economy

already operating at or near full capacity, on the one hand, and the risks

contained in U.S. trade policy, notably the NAFTA renegotiations. 

     "We see the Bank of Canada's preference as being not to hike so as to keep

the Canadian dollar low and support exports, coupled with the NAFTA and related

concerns" Krishen Rangasamy, senior economist at National Bank, told MNI.

"Despite this, the central bank must react to the improved economic data or risk

its credibility," he added.

     He expects Canada's real GDP growth to slow to a still decent 2.5% this

year from 3% in 2017 amid fiscal stimulation from provinces, further increases

in asset prices and still strong credit growth.

     --CAUTION TO CONTINUE

     "With all this, why wait to bring monetary policy back to a more neutral

state? So we think the BOC will move on Wednesday and three times more in 2018,

probably pausing in March and resuming in July."

     "Not quite so fast," Avery Shenfeld, vice-president and chief economist at

CIBC, cautions. "Four hikes in this one year would be overkill," he told MNI.

     CIBC expects a 25 basis point rate hike Wednesday, followed perhaps by one

in July after pausing in March, allowing the BOC to assess net trade "and give

the Canadian dollar time to cool off a bit."

     "After the summer we think hikes will come, but slowly, perhaps every six

months or so, for the next couple of years," Shenfeld said, stressing the BOC

will remain cautious in light of elevated household debt.

     --WATCHING THE FED

     Some analysts say, with Shenfeld, to watch the U.S. Federal Reserve. If it

keeps hiking quite often, the BOC could find it advantageous to hike more

slowly, which would "take some of the shine off the Canadian dollar."

     Paul Ferley, assistant chief economist at RBC, expects four hikes this

year, including one on Wednesday.

     "The data indicates that output is getting beyond capacity, reinforced by

wages now rising and the BOC's business outlook survey showing positive

intentions for plant and equipment and for hiring over the next year," Ferley

told MNI.

     The employment picture undoubtedly is strong, with a 5.7% record low

unemployment. According to the National Bank, the BOC had in past months

"understated the tightness of the labor market and will increase its policy rate

in January."

     The jobs report, and the Business Outlook Survey, were the main recent

events to persuade analysts into near-universal expectation of a Wednesday hike.

There was, though, other data not so bright, notably the widening merchandise

trade deficit in November.

     Some, as well, see a jobs-reducing effect of the minimum wage increases in

Ontario and Alberta.

     --SLOWING HOUSING

     On the housing front, analysts see a slowdown in the metropolitan areas of

Toronto and Vancouver, the country's tightest markets, as economic growth slows

over the coming year.

     Three BOC hikes this hear are expected by BMO senior economist Benjamin

Reitzes. Uncertainty about the effects of the new mortgage regimes that came

into effect January 1, the high rate of indebtedness, and NAFTA, will keep the

BOC cautious for the year, he told MNI.

     "We think that the tone of the Monetary Policy Report accompanying the rate

decision will be on the cautious side because of the uncertainties that are not

likely to dissipate for some time," he said.

     Assuming they raise the rate Wednesday, Reitzes said they will want to wait

and see what the impact of that cumulative increase since last July is on

consumers.

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

[TOPICS: M$C$$$]