BOC: Maintains Key Rate at 1.25%; To Stay Cautious>

By Courtney Tower

     OTTAWA (MNI) - The Bank of Canada kept its key policy rate at 1.25% 

Wednesday, as expected, and signalled as it has before that further 

hikes will come over time but cautiously. 

     As prospects darkened for the present NAFTA negotiations and over 

the new intended U.S. protections against steel and aluminum imports 

from Canada and elsewhere, the BOC highlighted that "trade policy 

developments are an important and growing source of uncertainty for the 

global and Canadian outlooks." 

     The brief statement accompanying the no-change decision, placed 

this uncertainty at the top of the one-page note and as a counterpoint 

to its anticipation that Canada's main market would grow in 2018 and 

2019. 

     --HIGHER, BUT LATER 

     The BOC, expected by market analysts to maintain the 1.25% rate, 

repeated its January assessment that economic prospects would likely 

warrant higher interest rates over time.  

     However, as it also said in identical words in January, "some 

continued policy accommodation will likely be needed to keep the economy 

operating close to potential and inflation on target." 

     The Bank would therefore continue to "remain cautious in 

considering future policy adjustments." 

     --THREE CHIEF DATA 

     The Bank said it would be guided by new data on three chief 

factors, all domestic: "the economy's sensitivity to interest rates, the 

evolution of economic capacity, and the dynamics of both wage growth and 

inflation." 

     The Bank said that growth of the economy by 3% in 2017 brought the 

level of real GDP in line with the BOC's January projection. However, 

fourth quarter growth of 1.7% was below the 2.5% it had expected. 

     On sensitivity to interest rates, the Bank noted particularly that 

"household credit growth has decelerated for three consecutive months." 

     Housing has been a prime factor propping up growth over the past 

several years. The Bank said it would "take some time" for it to fully 

assess the impact on housing of new federal mortgage guidelines and new 

provincial measures on housing demand and prices. 

     --NEAR CAPACITY 

     On inflation, the Bank said its three core measures "have edged up 

(to just under the desired 2%), "consistent  with an economy operating 

near capacity." 

     On wage growth, it said that this had "firmed, but remains lower 

than would be typical in an economy with no labour market slack." 

Inflation presently was fluctuating because of temporary factors. 

     On the economy's potential capacity, the Bank gave no assessment of 

whether the economy is operating at capacity now, as seen by analysts, 

or just how close to capacity it may be. It only said that gains in 

imports in the fourth quarter last year "mainly reflected stronger 

business investment, which adds to the economy's capacity." 

     Business investment, by all latest accounts, has grown only weakly, 

mostly on concerns over future sales to the United States. 

                         ** MNI OTTAWA ** 

--MNI Ottawa Bureau; yali.ndiaye@marketnews.com

[TOPICS: M$B$$$,M$C$S$]