BOC:Maintains 1.0% Key Rate;To Be Cautious About Future Chngs>

--Risks, Uncertainties Mean Present MonPol Stimulus Is 'Appropriate'

By Courtney Tower

     OTTAWA (MNI) - The Bank of Canada maintained its key policy rate 

Wednesday at 1.0%, as expected by most analysts, and signalled that 

because of many risks and uncertainties ahead it will be "cautious" 

about making any further change in it. 

     "Less monetary policy stimulus will likely be required over time," 

the Bank said in its policy statement. However, it would "be cautious in 

making future adjustments to the policy rate." 

     Any change would be, as the BOC has said many times recently, data 

dependent. In particular, that would mean data on how the economy 

adjusts to interest rates rising, how economic capacity (now at "close 

to its potential") develops and how presently slow wage growth and 

inflation evolve. 

     The BOC confirmed the expectation of analysts for no change in the 

policy rate, saying that "the current stance of monetary policy is 

appropriate" given the overall economic outlook and the "risks and 

uncertainties" that it identified in the Monetary Policy Report. 

     The risks and uncertainties are most notably about the various  

actions being taken by the United States federal administration against 

Canadian aircraft-making, lumber, and other industries and the outlook 

for the renegotiation of the North American Free Trade Agreement 

(NAFTA), the Bank said. This subjects the global outlook to "substantial 

uncertainty." 

     At home, the outlook is for headline inflation to continue to rise 

through the second half of 2018 to the desired 2.0% target. This is just 

slightly later than the BOC had anticipated in the previous MPR, in 

July, when it expected the 2% target to be reached in mid-2018. 

     As it has long been saying, the Bank expects that Canada's roaring 

GDP growth in the first half of this year should "moderate to a more 

sustainable pace in the second half of 2017 and remain close to 

potential over the next two years." It sees 1.8% real GDP growth for the 

third quarter this year, at an annual rate, and 2.5% in the fourth 

quarter. 

     The Bank sees, along with projections by private economists, real 

GDP growth of 3.1% for all of 2017, 2.1% in 2018 and 1.5% in 2019. 

     For the United States, by far Canada's largest market, it sees  

2.2% growth in 2017 and 2018, with the Euro area growing by 2.3% in 2017 

and 1.8% in 2018 (both above July estimates), and China and Japan 

growing better than previously expected. 

     The economy already is operating at "close to its potential" but 

slack remains in the labor market and that can lead to higher economic 

growth than the Bank is projecting "without inflation rising materially 

above target," the BOC said. 

     In key areas of the economy, the Bank sees growth but at somewhat 

reduced levels. For instance, projected export growth drops slightly 

from that of last July, as does business investment in plant and 

equipment. 

     "Because of high debt levels, household spending is likely more 

sensitive to interest rates than in the past," the BOC said, citing 

especially the housing-hot Greater Toronto and Greater Vancouver areas 

and nearby regions. 

     For exports, growth in recent months has been showing what the Bank 

calls "temporary weakness," and should improve "roughly in line with 

strengthening foreign demand." However, domestic demand will 

"decelerate" and the contribution of net exports to growth in 2018 and 

2019 drops slightly from what had been expected in July. 

     "Deteriorating competitiveness and the relocation of production 

outside Canada of some multinational firms have contributed to a loss of 

productive capacity and a reduction in the global market share of 

Canadian goods exporters," the Bank said. 

     "Uncertainty about proposed trade measures and the status of trade 

agreements is also assumed to be hindering Canada's ability to benefit 

from an improving global outlook," it said. It sees global growth of 

about 3.5% over 2017-2019. 

     For the all-important business investment, the Bank sends a mixed 

message. It sees business investment growing "at a more moderate, but 

steady, pace over the projection period." The recent Business Outlook 

Survey indicated that intentions to increase investment spending had 

declined "from previous high levels (but) they remain widespread across 

sectors and regions." 

     The Bank sees limited growth prospects for commodity-related 

business investment. Non-commodity business investment could be expected 

to expand with demand growth outside Canada, but "uncertainty about U.S. 

trade policy and structural challenges ... are expected to continue to 

restrain investment growth." 

     The structural challenges include "expected low trend labor force 

and productivity growth in Canada relative to history." 

     Household spending was expected to slow and residential investment 

to "contract modestly" over 2018-2019. With higher overall debt levels 

among households, spending on durable goods and housing would likely be 

"more sensitive to interest rate changes than in previous cycles." 

Higher interest rates and mortgage constraints applied federally and in 

some provinces affect many borrowers now and holders of fixed-rate 

mortgages more gradually, the BOC said. 

     Risks to the inflation outlook include, most importantly, "a 

notable shift towards protectionist global trade policies," the Bank 

said. It highlighted United States measures and prospects, but does not 

attempt to quantify the possibilities. 

     Risks to the upside included United States growth being stronger 

than expected and, in Canada, business investment and labor employment 

rising better than expected, the BOC said. 

     Continuing strong spending and elevated consumer confidence "point 

to underlying strength" and could persist "if growth in wages and 

household incomes were to increase faster than expected as the labor 

market approaches full employment," it said. 

     An important vulnerability remains: high prices and high debt 

levels in Greater Toronto and Greater Vancouver especially. These could 

make households more sensitive than assumed to interest rate increases 

and could trigger house price declines in these regions, "with modest 

direct spillovers to the rest of the country." 

                                  ** MNI OTTAWA **