BOC's Poloz: Although Raising Key Rate, NAFTA A Dark Cloud

By Courtney Tower

     OTTAWA (MNI) - The biggest cloud over Bank of Canada's discussions about

raising the key interest rate to 1.25% was NAFTA's uncertain future, Governor

Stephen Poloz said Wednesday.

     The BOC's Governing Council did move the target for the overnight rate up

25 bps from the 1.0% set last September because Canada's buoyant economic data

overwhelmed the doubts.

     Going forward, Senior Deputy Governor Carolyn Wilkins said the central bank

should not hike rates too quickly or too slowly. 

     "Raising the policy rate too quickly would risk stalling the expansion, and

cause inflation to fall back below target," she said. "At the same time, raising

the policy rate too slowly would risk a buildup of inflation." pressures.

     --NAFTA IMPACT

     Poloz and Wilkins told a press conference that their main concern is about

whatever impact the eventual NAFTA outcome has on long-term business investment.

     "The big cloud over our discussions was NAFTA," Poloz said. However, the

"string of positive surprises" in the economic data had increased the Bank's

confidence in the Canadian economy.

     "Trade will go on," Poloz said. More important was the effect of NAFTA

uncertainty on investment, on businesses possibly slowing their currently

positive investment intentions or actually moving locations to the United

States.

     The media session followed the BOC rate decision, its third 25 bps increase

since those of last July and September, and a quarterly update on an economy

operating near full capacity.

     --GROWTH GOOD AHEAD

     In the update, the Monetary Policy Report (MPR), the BOC expected GDP

growth of an estimated 3.0% for 2017 would fall to 2.2% in 2018.

     It saw exports and business investment up but not greatly in the next two

years, mainly because of the NAFTA uncertainty and tax cuts and trade measures

of the United States.

     For future rate hikes or otherwise, the good outlook on fundamentals of GDP

growth, strong employment, wage gains not pressuring employment, "remains

clouded by uncertainty related to the future of NAFTA," Poloz and Wilkins said.

     --EMPHASIS ON DATA

     What happens with business investment will be the main concern, and "data

dependency remains the watchword," Poloz said.

     There also was a concern over "the persistent decline or erosion in our

competitive position," with exports well below where they should be on an

historical basis even though they were picking up from recent lows.

     Moreover, Canada's vulnerability to external shocks to the economy, given

the record household debt, has increased, Poloz said. However, "our resilience

is improving."

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

[TOPICS: M$C$$$]