Analysts See No BOC Hike Weds Due To High Uncertainties

By Courtney Tower

     OTTAWA (MNI) - The Bank of Canada will hold its 1.25% policy rate on

Wednesday although the country's economic performance belies the need for

continuing such monetary stimulus, analysts said.

     The reason: a growing, not easing, list of uncertainties about trade for

Canada's key principal goods exports - autos - with U.S. President Trump's new

review of auto imports and threatened high tariffs, added to possible aluminum

and steel tariffs (Canada's exemption expires June 1), paper, lumber, the

tortuous NAFTA negotiations, and global protectionist tendencies.

     "With the Canadian economy at capacity, there is probably more stimulus in

the economy than would be warranted by the economic data alone," Paul Ferley,

assistant chief economist at RBC, told MNI.

     "The Bank has reason to be cautious until there is clarification on these

(trade) points," Ferley added.

     --STILL, HIKES INEVITABLE

     "The economy is showing enough momentum that the Bank is at some point

going to have to withdraw some of the stimulus," he said. The Royal Bank of

Canada believes the key overnight rate will rise by 100 basis points by

mid-2019.

     Most economists expect a series of hikes could begin July 11, almost

exactly a year since the first of three hikes thus far began on July 12, 2017.

     After starting on a weak note in January, key economic indicators in the

economy have improved to the point where it appears the first quarter may have

reached 2.0%, well up on the BOC's 1.3% forecast. That will be known when

Statistics Canada reports on GDP performance on Friday, after the Bank's

decision has been taken.

     Inflation remains firm (2.2% headline, a tick under the BOC's prediction),

retail sales are up, boosted by autos, oil prices have risen, exports were up in

March although dwarfed by imports.

     --NO PRESENT PRESSURES

     Looking ahead, "we see signs in the data of economic improvement in the

second quarter from the first, but nothing that pressures the BOC to hike now,"

Avery Shenfeld, chief economist at CIBC, told MNI. "The Bank can afford to wait

until July when we will have an early peek at the second quarter. If the economy

retains some of the momentum we saw late in the first quarter, they would be

justified in hiking at that point," he said.

     "They have the luxury of waiting," Shenfeld said. "Overall, the last three

quarters have seen relatively modest economic growth, with signs that growth

picked up at the end of the first quarter this year. If that is sustained into

the second quarter, that would justify a hike in July."

     Shenfeld also cited the trade threats from the United States as a major

reason for caution. "We have now the threat of large tariffs on our auto

exports, as well as those to steel and aluminum, lumber and paper," he said.

"And we are far from agreement on NAFTA."

     --HARD OR SOFT HOUSING?

     For Sal Guatieri of BMO, as for the others, all these risks are joined by

that of hard or soft landing for housing. The red hot Toronto and southern

Ontario markets had to cool off, but the cooling has been dramatic because of

affordability problems along with government measures to curb mortgage lending

plus the higher interest rates on mortgages that have been developing.

     The housing issue is similar on the west coast of Canada, in Vancouver,

British Columbia, and its environs.

     Paul Ashworth, chief North America Economist for Capital Economics,

believes that the Bank of Canada "will remain firmly on the sidelines over the

next few months." That would largely be because of "Canada, with its

heavily-indebted household sector, is the least well-placed (among developed

countries) to cope with the tightening in global financial conditions."

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

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