Analysts See BOC on Hold In Sept Despite Strong 2Q GDP

By Yali N'Diaye

     OTTAWA (MNI) - Analysts expect Canadian GDP growth to once again exceed the

Bank of Canada's projections in the second quarter, which, however, is unlikely

to translate into a September tightening by the data-dependent central bank.

     Analysts in a MNI survey expect the second quarter real GDP annualized

growth rate to remain at 3.7% despite a slowdown in June, when GDP by industry

is anticipated to edge up 0.1%, after rising 0.6% in May and 0.2% in April.

     Even the most pessimistic forecaster sees second quarter GDP expand by 3.2%

in the second quarter, which would still beat the BOC's 3.0% projection.

     At the high end of the range, GDP is seen growing 4.0%, a full point above

the BOC's estimate, with consumer spending still providing a solid boost, along

with support from non-residential investment and, to a limited extent, a

positive contribution from net exports. Residential investment, on the other

hand, is expected to be a drag.

     Nonetheless, the BOC is seen keeping its overnight rate target unchanged at

0.75% on September 6, after a 25 basis point hike in July, even for Action

Economics economist Ryan Brecht, who forecast a 4.0% GDP growth in the second

quarter.

     Reflecting the consensus expectation of a 3.7% second quarter GDP growth,

Citi expects the central bank to wait until October 25.

Economist Dana Peterson cited low inflation, downside risks stemming from NAFTA,

U.S. fiscal and monetary policy.

The BOC would have a strong case for hiking rates in September if it was just

concerned about being behind the curve and about the threat that too low for too

long rates pause to the financial system, Peterson told MNI.

Growth data showing the economy has roughly achieved its structural adjustment

and that the labor market is nearly at full employment would also justify a

September hike.

However, inflation, the BOC's only mandate, remains "very weak," she stressed.

Even though two of the three BOC's preferred measures of core inflation picked

up in July, they still ranged between 1.3% for CPI-trim and 1.7% for CPI-median,

below the BOC's 2% mid-range target. And with CPI-common stable at 1.4%, two of

the three measures are at the lower end of the 1% to 3% range.

In light of such inflation readings, the BOC would need to make a "very strong

case" for a rate hike as early as September 6, with no clear evidence such

weakness is temporary, Peterson said.

By waiting until October 25, the BOC will have a better idea of the inflation

trajectory relative to its projections.

On the external front, with NAFTA discussions having just started, waiting until

October 25 would allow the BOC to have a clearer picture of where discussions

are headed, with Peterson seeing only a 10% probability of a termination by the

U.S.

Regarding financial conditions, monetary policy tightening in the U.S. is also

lifting Canadian yields, with the potential to weigh on Canadian consumer

spending given elevated household debt, Peterson said.

The other downside risk from the U.S. stems from uncertainty about fiscal

policy.

On the communication front, there has been no hint from the BOC of any imminent

rate hike.

In addition, the BOC will be able to better explain a tightening during a press

conference and in its monetary policy report (MPR) if it waits until October,

since the September 6 decision will only be accompanied by a policy statement.

     Desjardins economist Jimmy Jean, also expecting a 3.7% GDP growth in the

second quarter and no rate hike in September, agreed.

     "We expect the BOC to stick to MPR meetings, at the very least in these

initial stages of the normalization," he told MNI.

     Statistics Canada will publish GDP data Thursday at 8:30 am ET.

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

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