**MNI BOC ANALYSIS: Poloz Staying The Course On Normalization

By Yali N'Diaye

     OTTAWA (MNI) - Bank of Canada Governor Stephen Poloz stayed the course

Tuesday when he indicated the central bank will continue its policy

normalization in a cautious way: not too quickly, not too slowly.

     In light of economic progress, the BOC is "becoming more confident that the

economy will need less monetary stimulus over time," he said, stressing that at

1.25%, the policy rate is "well below" the neutral rate.

     Poloz also noted during a press conference following a speech to the

Yellowknife Chamber of Commerce in Northwest Territories that GDP data published

Tuesday morning were "encouraging." February GDP came in at +0.4%, beating

analysts' expectations of a 0.3% growth.

     However, some forces are still restraining the economy, Poloz stressed,

citing new mortgage rules, U.S. trade policies and Canadian exporters'

competitiveness challenges. 

     As a result, "some monetary policy accommodation will still be needed." 

--NO RUSH 

     Poloz continued to signal the BOC need not rush to hike rates, especially

in a context of elevated household debt, at the risk of "choking off growth,"

limiting the probability of a hike on May 30. 

     He stressed that "given current levels of household debt, we expect that

moves in our policy rate will have a stronger impact in cooling demand than they

did in previous years."

     So the BOC will remain "cautious" and data dependent, he said.

     Besides, "it is still too soon to know just how strong an impact" the

cumulative 75 basis point rate hikes since last July will have, he said.

--BUT IT'S COMING

     That being said, by reasserting the BOC's growing confidence that rates

need to increase, Poloz kept the probability of a July rate hike relatively

high.

     While elevated household debt, the subject of Tuesday's speech, will

continue to pose a risk to the financial system stability and the economy,

"there is good reason to think that we can continue to manage these risks

successfully," he said.

     He noted that Canada's financial system is "resilient" and that there are

signs the recent mortgage rules are working in light of the reduction in new

mortgages characterized by very high loan-to-income.

     So while household debt remains a barrier to the normalization process,

given the signs of improvement and Poloz' optimism in the ability to manage the

risks associated to debt, the bar would be high for household debt alone to

delay a rate hike since its reduction is expected to last over a long period of

time, just as the debt buildup has taken years.

     Debt-related "risks will be with us for some time," Poloz said. "But there

is good reason to think that we can continue to manage these risks

successfully."

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

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