MNI BOC ANALYSIS: Caution Should Continue Despite Higher Infl

By Yali N'Diaye

     OTTAWA (MNI) - Canadian inflation rose above target in February and

underlying inflation came close to 2.0%, but with further signs of a slowdown in

activity and escalating trade tensions triggered by U.S. protectionist policies,

it is unlikely that the Bank of Canada will abandon its cautious approach.

     Statistics Canada reported Friday that headline inflation accelerated to

2.2% in February, the highest rate since October 2014.

     At the same time, however, the data-dependent BOC will have to factor in

weaker-than-expected retail sales in January reinforcing the scenario of a

growth slowdown.

--CORE INFLATION ACCELERATES

     The range of three BOC's preferred measures of underlying inflation edged

up further to 1.9%-2.1% from 1.8%-1.9% in January. CPI-common picked up to 1.9%

from 1.8%, the highest since February 2012. CPI-trim and CPI-median both rose

2.1%, their highest rates since June 2016 and October 2016, respectively. 

     Goods inflation also accelerated to 1.7% from 1.1% in January.

     Yet key sources of concerns remain and should keep the central bank on

edge.

--SLOWING GROWTH

     Statistics Canada reported Friday that retail sales rose 0.3% in January,

less than the 1.0% gain expected by analysts in a MNI survey. 

     Sales volumes, more relevant to real GDP, edged up just 0.1% after a 0.6%

drop the previous month. Overall, the failure to rebound more strongly on the

back of a disappointing 0.7% drop in December confirms the weakening momentum in

consumer spending.

     A slowdown, in and of itself, has been expected by the central bank.

However, several weaker-than-expected data have been raising downside risks to

the outlook.

--HOUSEHOLD DEBT

     In addition, BOC Senior Deputy Governor Carolyn Wilkins said Thursday

elevated household debt is keeping her up at night. 

     Against the backdrop of rising policy rates and tighter macroprudential

policies likely to weigh on housing prices, financial vulnerabilities remain,

she told the University of Toronto's Rotman School of Management.

     Wilkins' speech suggested there could be a greater sense of urgency to

understanding what macroprudential measures could mean for monetary policy. 

     She called for further strengthening of a framework in which "monetary

policy and macroduprential policies reinforce each other."

     "A solid framework is essential to reduce the likelihood of undue pressure

for monetary policy to lean against the build-up of financial vulnerabilities,"

Wilkins said.

--TRADE WAR

     On the external front, the Trump administration spared Canada when it comes

to tariffs on steel and aluminum imported to the U.S., provided a NAFTA deal is

reached that satisfies U.S. demands.

     Avoiding such tariffs, combined with reports that the U.S. dropped a key

demand related to the auto sector, raised prospects for a deal.

     However, the trade war with China further clouded the global outlook, with

questions about a broadening wave of protectionism involving other countries and

the fallout for Canada, for which the U.S. is the largest goods export market,

followed by China.

--INFLATION TARGET RANGE

     So while inflation topped the target in February and underlying inflation

continues to pick up, the central bank continues to have serious reasons to

remain cautious.

     It is likely to continue to give itself time to continue to assess the

economy's response to its cumulative 75 basis point rate cuts since last July.

     In fact, Wilkins said in her speech Thursday that "there may be, in

different situations, a case for taking longer to bring inflation back to target

than the usual six to eight quarters."

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

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