**MNI BOC ANALYSIS: Clearer Housing View Could Mean July Hike

By Yali N'Diaye

     OTTAWA (MNI) - Bank of Canada Governor Stephen Poloz reiterated this week

that the central bank is growing more confident about the need to continue on a

tightening path, with the question being more about the pace and timing. 

     On that front, more clarity in the summer about the dynamics of the housing

market could combine with a potential NAFTA deal soon to provide a green light

for a July rate hike.

     With BOC's top officials continuing to stress uncertainty about U.S. trade

policies and the sensitivity of the Canadian economy to higher interest rates,

caution continues to apply to the pace of tightening, making a July hike more

likely than May, as the BOC will likely prefer to wait for a clearer housing

visibility. 

     The central bank will also want to make sure its growth rebound scenario

materializes after a weaker-than-expected first quarter. Statistics Canada won't

release first quarter GDP data until May 31, a day after the next BOC's

announcement, and only data for the first month of the second quarter will be

available by then.

     --HOUSING UNDER WATCH

     With progress on the inflation and wage fronts, the housing market and

household debt are even more closely watched to determine the timing of the next

rate hike.

     BOC Governor Stephen Poloz told lawmaker Monday that housing fundamentals

remained very strong, and Senior Deputy Governor Carolyn Wilkins said during a

joint testimony before the House finance committee that the housing market was

able to handle current interest rate levels.

     But with the combination of tighter monetary and macro prudential policies,

and the decline in home sales at the beginning of the year after homebuyers

rushed to finalize transactions at the end of 2017 to avoid new underwriting

standards in effect since January, the BOC has to determine to which extent the

weakness of home sales is just a timing issue in response to new mortgage rules,

a response to higher interest rates or a shift in the underlying sentiment.

     Breaking down such factors will take "more than a few data points," Poloz

said. 

     "We will see over the summer and by September we will have new data and we

will be able to see what the effect has been" of new measures and higher

interest rates, Wilkins specified, making a May hike unlikely.

     --BOC MORE CONFIDENT

     Another takeaway from appearances before the Senate and the House this week

is that Poloz reaffirmed the central bank's greater confidence in the need to

hike rates, after the April 18 statement said progress on the inflation and wage

growth fronts "reinforces Governing Council's view that higher interest rates

will be warranted over time."

     Poloz said he can now describe economic conditions in "finally positive

terms", as most adjustments to the oil price shock are behind us.

     "Overall, we're quite encouraged," he said.

     "We have increasing confidence" that "we're there and the economy is close

enough to its potential that we're in that space where it's more a question of

the timing - at what pace do interest rates move towards more normal levels," he

said.

     While the pace will be data dependent, Poloz warned against moving too

quickly - given financial system stability risks - or too slowly.

     --RISING OIL PRICES

     Rising oil prices, if they were to persist, could also become an upside

risk to the BOC's outlook.

     The April Monetary Policy Report assumed a USD65 per barrel price for the

Brent, USD60 for the West Texas Intermediate (WTI), and USD40 for Western Canada

Select (WCS), below current levels.

     That being said, Poloz repeated this week that at current levels, oil

prices are unlikely to lead to new investment projects in the oil industry,

suggesting the BOC is not, for the time being, changing its mind based on the

latest oil price gains.

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

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