MNI 5 THINGS:BOC Key Rate Up 25 bps To 1.50%, As Expected>

By Courtney Tower

     OTTAWA (MNI) - Following are the key points from the Bank of 

Canada's interest rate announcement Wednesday, when the policy interest                                                     

rate rose from 1.25% to 1.50%, as expected: 

     --The BOC said it "expects that higher interest rates will be 

warranted."  They would be imposed gradually, "guided by incoming data." 

The BOC will especially monitor, as before, the adjustment of the 

economy to higher interest rates as well the evolution of pressures on 

capacity and wages. Also to be monitored, now: "the response of 

companies and consumers to trade actions." The BOC stresses the dangers 

of trade protectionism, seen as "the most important threat to global 

prospects." It noted the lower Canadian dollar despite higher oil prices 

was due to broad-based U.S. dollar strength and concerns about trade 

actions. 

     -- The Bank continues to outline an economy operating close to 

capacity, with average growth of 2% projected over 2018-2020. Trade 

uncertainty was having a larger than previously expected impact on 

Canadian investment and exports, although the recent United States 

tariffs on Canadian aluminum and steel and Canadian retaliatory tariffs 

should, overall in the economy, have a "modest" effect on growth and 

inflation. Despite increased trade protectionism posing "the most 

important threat to global prospects," solid global and especially U.S. 

growth would support Canadian exports, investment, consumption. Still, 

the report highlights risks from U.S. trade policy and tariffs to a 

higher degree than before. 

     -- Projections for Canadian CPI inflation are 2.4% for 2018 (versus 

2.3% earlier expected), 2.2% in 2019 (vs 2.1%), 2.1% in 2020 

(unrevised). Core inflation measures "remain near 2%, consistent with an 

economy operating close to capacity." For real GDP, the projections are: 

2.0% for 2018 (unrevised), 2.2% for 2019 (vs 2.1%), 1.9% for 2020 (vs 

1.8%). Annualized GDP growth should slow to 1.5% in the third quarter 

from 2.8% in the second quarter. The BOC said temporary factors are 

causing volatility in quarterly GDP growth rates. 

     -- Housing markets are seen as stabilizing after a weak start to 

the year, with household spending dampened by higher interest rates and 

tighter mortgage lending. The record high ratio of household debt to 

disposable income is "edging down." Residential investment likely 

contracted in the first half of this year but the BOC sees "a partial 

rebound in resales" coming in the third quarter. Consumption growth was 

expected to be supported by a pickup in wage growth and higher oil 

prices, but tempered a "a modest slowdown" in growth of hours worked and 

the revised mortgage rules. 

     -- The BOC revised its estimate of the output gap, putting it at a 

range of -0.5% to +0.5% versus the April assumption of -0.75% to +0.25%. 

It says this was due to growth having been estimated to have exceeded 

the pace of potential output growth in the second quarter. Business 

investment was more robust than expected in the first quarter and that 

stronger level of investment spending was expected to persist through 

2020, "partly reflecting higher oil prices." The growth rate of 

potential output now is assumed to be at 1.8% this year and 1.9% in 2019 

and 2020. The neutral nominal policy rate for Canadian remains 

unchanged, at between 2.5% and 3.5%. 

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

[TOPICS: M$C$$$,MACDS$]