Analysts: Strong GDP Won't Rush BOC Into September Hike

By Yali N'Diaye

     OTTAWA (MNI) - Canada's GDP topped analysts' expectations in May, when it

expanded 0.6%, lifting the 12-year rate to 4.6%, the highest since October 2000,

with gains in nearly 70% of industries, Statistics Canada reported Friday.

     Yet, even as the Bank of Canada stressed its dependence on data for its

next moves, analysts don't expect it to rush with another rate hike as soon as

September 6, after having raised the overnight rate target by 25 basis points to

0.75% in July.

     In July, the BOC was encouraged by the broadening of growth across regions

and sectors, which was confirmed by Friday's data, as 14 of 20 industries posted

declines, representing nearly 70% of total GDP.

     But neither will the BOC respond with a rate hike in September, nor will it

hike more than a cumulative 50 basis points this year, leaving only one hike on

the table through the end of 2017, according to analysts, enough to remove the

50 basis point insurance taken against weak growth in 2015.

     Analysts argued that a September hike would heighten volatility and send

the message of a central bank rushing rather than adopting a gradual approach.

They also pointed out the below-target inflation readings.

     Once this insurance is removed with a 25 basis point rate hike in October,

Desjardins Senior Economist Jimmy Jean told MNI he expects hikes at 6-month

intervals.

     Following Friday's GDP release, TD Senior Economist Brian DePratto

estimated the second quarter GDP is now tracking 3.8%. 

     He told MNI that while a December hike is a possibility, "the Bank of

Canada is likely to take a more cautious approach in light of inflation that is

expected to remain well below target."

     As a result, after tightening in the fall, he too expects the following

hike in April.

     "A return to a more cautious communication strategy and pace of interest

rate increases is expected in light of the headwinds facing Canada, and evidence

suggesting that recent economic strength may not translate as meaningfully into

inflationary pressures relative to historic experience," DePratto also wrote in

a commentary.

     After a pause in September, and a hike in October, the next move will have

to come from the Federal Reserve "in order to prevent the Canadian dollar from

reaching levels that will cut too deeply into both inflation and export growth,"

according to CIBC Chief Economist Avery Shenfeld.

     Shenfeld now sees Canada's second quarter annualized real GDP growth around

3.5%, above the BOC's 3.0% projection.

     RBC Economist Josh Nye told MNI that while Canada's GDP is now tracking

3.7% in the second quarter, the BOC will prefer to pass on a rate hike in

September, preferring October instead, which "would set the tone for a more

gradual pace of tightening that we think the BOC is after."

"Even with the economy nearing full capacity, we think the BOC will want to be

fairly gradual in removing accommodation given high debt levels, which Governor

(Stephen) Poloz noted might make households more sensitive to rate hikes than in

the past," Nye continued.

     He said that in addition to the message about the pace of tightening and

household debt level considerations, the BOC will want to see more evidence of

inflation returning to the 2% target in response to diminishing economic slack,

as it expects.

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

[TOPICS: M$C$$$]