MNI BOC ANALYSIS: Emphasis Still On Temp Factors for Inflation

By Yali N'Diaye

     OTTAWA (MNI) - Bank of Canada Governor Stephen Poloz continued to emphasize

Thursday the temporary nature of factors behind inflation numbers that have been

persistently above target.

     In July, Canada's CPI rose 3.0% year-over-year from 2.5% in June and 2.1%

in May, testing the upper bound of the 1%-3% operational range. The central bank

attributed this higher-than-expected increase "in large part" to the jump in

airfare in its September policy statement.

     While the headline inflation rate declined to 2.8% in August, raising

questions about the temporary nature of upward pressures, it remained well above

the 2.0% mid-range target.

     In addition, the three preferred measures of core inflation, while still

around 2.0%, continued to edge up.

     However, Poloz, in a speech to the Atlantic Provinces Economics Council and

Greater Moncton Chamber of Commerce, New Brunswick, signaled that the BOC still

believes that upward forces remain temporary, explaining 0.8 points of the 2.8%

August rise: 0.5 percentage points were explained by higher gasoline prices, and

0.3 percentage points by the cost of air travel.

     Such factors, he said, should only affect inflation "temporarily."

     --STAYING GRADUAL

     Besides, in a speech otherwise dedicated to advances in digital

technologies, Poloz said the latter "could be giving the economy more room to

grow before inflation pressures emerge."

     Even though Senior Deputy Governor Carolyn Wilkins revealed after the

September 5 policy announcement that the Governing Council discussed whether the

pace of tightening was appropriate given that the economy was operating at

capacity, Poloz' comments Thursday indicated no intention to pick up the pace

despite higher-than-expected inflation rates.

     Still acknowledging uncertainty related to NAFTA and the impact of tighter

mortgage rules in effect since January, Poloz reaffirmed the gradual, data

dependent approach.

     "We will move rates toward a more neutral level gradually," he said,

stressing that uncertainty does not justify "inaction" but that the BOC should

tighten neither too fast nor too slowly.

     And despite the new phase of heightened tensions between U.S. and Canadian

negotiators following President Trump's comments Wednesday pointing to his

distaste for Canadian foreign minister Chrystia Freeland, Poloz took an

optimistic view on the outcome of NAFTA negotiations during a question and

answer session following his speech, noting that both Canada and the U.S. have

"so much" to gain from reaching a deal.

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

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