MNI BOC State of Play: Looking Through Lower CPI

By Yali N'Diaye

     OTTAWA (MNI) - The Bank of Canada is more than likely than not to look

through December's all-item CPI figures released Friday, that showed a monthly

contraction of 0.4% translating into a softer 12-month rate of 1.9%, down from

2.1% in November.

     First, the BOC itself said in its January 17 Monetary Policy Report and

interest rate announcement that it expected inflation to "fluctuate in months

ahead."

     In particular, it anticipated inflation to "ease" in January, "reflecting

the transitory effects of elevated gasoline prices a year earlier." So the

central bank is currently looking through such fluctuations, with inflation

expected to remain close to the 2% mid-range target through the end of 2019.

     --INFLATION PROJECTION MATCHED

     Second, with December's data, the fourth quarter CPI came in at an average

1.8%, matching the BOC's January projection, following a 1.4% increase in the

third quarter.

     And last but not least, two of the preferred measures of core inflation

actually confirmed the recent upward tendency reflecting inflationary pressures

as economic slack is being absorbed.

     CPI-common, which tracks common price changes across categories, rose 1.6%

after 1.5% in November. CPI-trim, which removes components whose rates of

changes are in the tails of the distribution, rose from 1.8% in November to 1.9%

in December, the highest rate since October 2016.

     Meanwhile, CPI-median, which reflects the price change at the 50th

percentile of the distribution, continued to rise at a steady pace of 1.9%.

     As a result, the range narrowed toward the top, rising to 1.6%-1.9% from

1.5%-1.9%.

     --CORE RETAIL HOLDS

     On the activity front, Canadian retail trade growth slowed more than

expected in November, when sales edged up 0.2% on the month after an upwardly

revised 1.6% increase in October.

     However, here too the BOC is unlikely to be thrown off its path of

"cautious" tightening given that core sales excluding the volatile auto and

gasoline stations components remained solid.

     Sales excluding autos and parts and gas stations indeed rose 0.9% in

November, supported by a 0.8% increase in volumes.

     At the wholesale level, while the 0.7% gain in November was smaller than

markets had expected, it came on the back of a 3.4% surge in manufacturing sales

over the month to a record C$55.5 billion.

     As a result the BOC is likely to wait and continue to assess the impact of

its rate hikes - a cumulative 75 basis points since July 2017 - but so far, data

do not justify to change course as they have mostly played into the central

bank's scenario.

     The BOC, however, continues to eye developments related to NAFTA, as a

pullout from the U.S. could alter its scenario depending on the economy's

reaction, notably through business investment.

     The BOC expects Canada's real GDP to grow at an annualized pace of 2.5%

both in the fourth quarter 2017 and the first quarter 2018, before slowing to a

rate that is closer to potential.

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