MNI: BOC State of Play: More Dovish BOC Emphasized Caution

By Yali N'Diaye

     OTTAWA (MNI) - While the Bank of Canada's latest Monetary Policy Report

Wednesday judged that risks to the inflation outlook continued to be "roughly

balanced," the policy statement accompanying the decision to leave rates

unchanged emphasized caution.

     Adding to the more dovish touch of the statement compared to September -

despite the clear indication that rates need to be raised again at some point -

Governor Stephen Poloz said during a press conference that "given our recent

history with inflation running below target, we continue to be more preoccupied

with the downside risks to inflation."

     He repeated the need to consider every meeting as "live", with each data

point adding to the picture.

     A picture that is filled with "risks and uncertainties," the latter being

qualified as "substantial" at the global level given the unfavorable turn taken

by the negotiations related to the North American Free Trade Agreement.

     While recognizing the NAFTA risk that is holding back some investment

decisions, and the recent worsening of the negotiation outlook, Poloz said the

central bank will only take into account the outcome of the discussions "in due

course", reminding that the range of possibilities is "large."

     He pointed out that tariffs such as the ones applied in the context of the

World Trade Organization are smaller than the exchange rate adjustments that

have taken place this year, explaining part of the inflation weakness and the

slightly slower export growth projected by the BOC. 

     "At the moment, we are more preoccupied with the four issues that I

outlined in more details," he told reporters, which are fundamentally data

dependent: the softness in inflation and wage growth, the extent of excess

capacity in the economy, as well as the high level of household debt and the

implications for the economy's response to higher interest rates.

     The BOC said the Canadian economy is operating close to capacity,

estimating the output gap between -0.5 and 0.5 per cent in the third quarter,

suggesting the timing for closing the gap was sooner than the end of 2017 stated

in July.

     And even as growth is expected to remain close to potential in 2018 and

2019, inflation projections were little changed. If anything, the appreciation

of the Canadian dollar since July actually delayed, albeit slightly, the date

when inflation should reach the 2% mid-range target to the second half of 2018

from mid-2018.

     So despite the upward revision to 2017 GDP growth to 3.1% in 2017, the

slowdown expected going forward and the still puzzling below-target inflation

readings turned the attention of the central bank to the downside risks, all in

the global context of substantial geopolitical uncertainties that provided a

more dovish tone than in September.

     In fact, most analysts are now expecting the BOC to be on hold in December

as well.

     But in the end, the BOC made clear it will come down to data and won't act

on anticipations related to the outcome of NAFTA even as it follows the

renegotiation process.

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

[TOPICS: M$C$$$]