MNI BOC ANALYSIS: Growing Emphasis on Protectionist Threat

By Yali N'Diaye

     OTTAWA (MNI) - Comments by Bank of Canada Deputy Governor Timothy Lane

Thursday in an Economic Progress Report speech reinforced the emphasis on

trade-related uncertainties, and consequences for business investment in Canada,

reinforcing the more dovish tilt of the policy statement published Wednesday

relative to January.

     In its policy statement Wednesday, the BOC stressed that "trade policy

developments are an important and growing source of uncertainty for the global

and Canadian outlooks." 

     --RISING TRADE CONCERN

     The language introduced a greater sense of concern relative to January,

when such uncertainties were clouding the outlook. 

     Lane took it a step further in his speech Thursday, with a stronger wording

highlighting the need to watch how "global trade tensions" evolve. 

     "Recent developments with respect to steel and aluminum, alongside

increased protectionist rhetoric, carry potentially serious consequences," he

said. 

     On the external front, Lane also expressed concerns about a possible

disappointment from non-energy goods exports in light of competitiveness

challenges.

     --INVESTMENT AT RISK

     Canada could also face more challenges on the investment front stemming

from the U.S. tax reforms, which "may further reduce the relative attractiveness

of investing in Canada." This would add to uncertainty related to trade

agreements, especially NAFTA, that is already affecting investment.

     The BOC has already factored in such effects on business investment in its

January projections. However, Lane indicated the impact could be revisited.

     "As we prepare our April forecast, we'll assess whether the degree of

caution we've applied is still appropriate," he said. 

     --HOUSEHOLD DEBT SLOWS

     There are still positives that continue to warrant higher interest rates

down the road, however, as Canada's economic activity is "progressing well,"

with growth "close to its full potential," and benefiting from a synchronous

global growth.

     To be sure, there is still slack in the labor market despite higher wages.

     But overall, inflation is expected to return to the 2% target in the coming

months.

     Meanwhile, household debt growth has been slowing, Lane said, stopping

short, however, of considering it a trend, as it is too early to tell. 

     If that was the case, that would show the rate hikes are having the desired

effect on debt while avoiding to stall growth and trigger a housing market

collapse. The door would remain open to more gradual hikes.

     But given the "notable" and growing uncertainties, the normalization

process, if anything, is more likely to slow than not at this point.

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

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