MNI BOC State of Play: Between Stronger Growth and Higher CAD

By Yali N'Diaye

     OTTAWA (MNI) - Canada's GDP growth reached 0.6% in May, topping analysts'

expectations and putting growth on a stronger path than the Bank of Canada had

projected even after having already upgraded its outlook as recently as July 12.

     The GDP gain in May lifted the 12-month growth rate to 4.6%, the highest

since October 2000 and marked the seventh consecutive monthly increase, which

had not been seen since September 2009-March 2010.

     Goods-producing industries led the way with a 1.6% increase, boosted by a

rebound in the oil and gas sector, following "difficulties" at an Alberta

facility related to a fire and explosion in March.

     Services output was up 0.2% on the month, a slight slowdown from 0.3% in

April, but keeping the rising streak intact since September 2015.

     By analysts' estimates, such a performance would put the second quarter

annualized GDP growth rate between 3.5% and 4.0%, above the BOC's 3.0%

projection.

     Such data, combined with an uptick in core inflation readings, only

reinforce the case for further tightening, the question being whether the

central bank is willing to pick up the pace of policy normalization after

stepping up its hawkish rhetoric.

     The central bank is counting on stronger exports and business investment

going forward to help boost growth, while household consumption should slightly

slow down.

     This is where the data dependent central bank meets a dilemma: with NAFTA

negotiations leaving a cloud on the export outlook and the Canadian dollar

having been strengthening against the greenback since early May, how quickly can

it respond to stronger growth without jeopardizing export recovery, a key pillar

of its scenario?

     Not to mention that the BOC wants a gradual adjustment, as opposed to a

sharp correction, of housing imbalances and household debt.

     So while the BOC has stressed its dependence on data,

stronger-than-expected GDP numbers might not lead to a catch up in the pace of

tightening just yet, with the BOC likely to particularly focus on export

performance in response to the higher loonie. Should data show a sustained

strength above expectations, however, they could change that stance, especially

if exports prove resilient and NAFTA uncertainty fades as negotiations progress,

all the while fiscal policy remains supportive.

     The next BOC announcement will be September 6, followed by two more on

October 25 and December 6.

     The BOC raised its policy rate by 25 basis points in July to 0.75%, taking

out half of the "insurance" against weaker growth provided in 2015. Most

analysts expect another 25 basis point hike in October. 

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

[TOPICS: M$C$$$]