MNI BOC ANALYSIS: Markets Understood May Message But Trade Key

By Yali N'Diaye

     OTTAWA (MNI) - Bank of Canada Governor Stephen Poloz acknowledged at a

press conference Wednesday that financial markets correctly understood the Bank

of Canada's message in May that it felt more confident about economic

developments and the need for higher interest rates, but he noted that there is

still a "litany of unknowns," especially around trade tensions that are

occurring at a critical stage of the business cycle.

     As a result, a July rate hike may not be a sure thing. 

     In its May 30 policy statement, the BOC had dropped the reference to

"cautious" to replace it with a "gradual" approach.

     "Developments since April further reinforce the Governing Council's view

that higher interest rates will be warranted to keep inflation near target," the

May statement said. It added the BOC "will take a gradual approach to policy

adjustments, guided by incoming data."

     "Financial markets understood our message," Poloz said Wednesday following

a speech to the Greater Victoria Chamber of Commerce in British Columbia.

     --PARTICULARLY DATA DEPENDENT 

     Yet he left the door open for foregoing a rate hike on July 11.

     Even as the market understood the message in May, Poloz stressed that each

announcement starts "on a blank page." 

     He also stressed the "litany" of unknowns that makes the BOC "particularly

data-dependent right now." Before the July 11 meeting, several key data are due

to be released, notably GDP on Friday and trade and employment data July 6, as

well as housing starts on July 10.

     The list of unknowns also includes the extent to which uncertainty around

trade policy is holding back business investment, the impact of tighter mortgage

rules on the housing market, and the sensitivity of the economy to interest

rates.

     --TRADE TENSIONS KEY

     On the trade front, the BOC will incorporate the effects of U.S. tariffs on

steel and aluminum, as well as retaliation, in Canada and globally, into its

next projections in July, Poloz said.

     The issue will also "figure prominently in our upcoming deliberations," he

said. 

     With the economy near potential and inflation at target, firms are

investing, but not as much as would be expected at this stage of the cycle due

to uncertainties around U.S. trade policy.

     However, he added that he doesn't make decisions based on "rhetoric."

     --MORTGAGE RULES, HOUSING

     Another key point of the BOC's upcoming deliberations will be the impact of

tighter mortgage rules on the housing market and mortgage renewals, Poloz said.

     Moody's Analytics said Wednesday that it expects year-over-year price

growth to pick up to 0.7% in 2019 from 0.1% this year in Canada.  

     Moody's Analytics Housing Economist Andres Carbacho-Burgos wrote in a

report that improving affordability and tighter underwriting standards,

especially stress tests, make an extended house price correction "unlikely".

     Poloz also showed confidence that such stress tests should make households

more resilient to higher mortgage rates.

     --NO FORWARD GUIDANCE

     Despite high uncertainty, the BOC is not planning to provide any forward

guidance.

     Rather, routine guidance in the face of current uncertainties would put the

BOC's credibility at risk, Poloz said.

     He reaffirmed his view that forward guidance should be kept for

"extraordinary times."

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

[TOPICS: M$C$$$]