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Fresh Session Lows After RBA's Lowe Speaks

By Courtney Tower
     OTTAWA (MNI) - The Bank of Canada knows that its interest rate stimulus to
the economy has to be reduced but is unsure by how much and for how long rate
hikes should ensue, Governor Stephen Poloz said Wednesday.
     Poloz told reporters that the Bank especially will want to see improvement
in present business reluctance to invest in exports-increasing plant and
equipment.
     Such investment is key to export improvement but businesses hesitate to go
beyond positive intentions and actually invest, amid trade tensions and
uncertainties regarding NAFTA and China-United States trade conflicts, Poloz and
Senior Deputy Governor Carolyn Wilkins said.
     "We  can't be definitive about when or at what pace," rate hikes should
come, Poloz said, although the Bank continues its double-edged projection: given
the economy and its prospects, rate hikes in future are "warranted" but some
degree of stimulus must remain.
     Poloz and Wilkins spoke to reporters after the Bank issued a stand-pat rate
decision, at the present 1.25%, and in an accompanying Monetary Policy Report
cited several economic positives:  inflation is "on target"; potential output is
up and projected to be up through 2020, from the January forecast; GDP growth
will enjoy "a strong rebound" in the second quarter after a "lackluster first
quarter"; the labor market is strong despite some slack remaining; exports,
although declining in market share will come back somewhat due to U.S. demand
improving.
     Despite all that, Poloz said that "without low interest rates, the economy
would not be where it is today." In prepared remarks to the reporters, before
taking questions, he said "the economy is not yet able to remain at full
capacity on its own." Further, the sustainability of the present level of
activity "is not assured."
     --FOUR KEY FACTORS
     In that vein, the Bank is looking at "four key sources of uncertainty" in
the outlook for inflation:
     --Increasingly, Canada's export performance is being hampered by
international competitiveness challenges, including the trade uncertainties,
transportation bottlenecks of oil and commodities transmission to the United
States and beyond, and "a shortage of skilled workers."
     -- Inflation although the Bank is reassured by recent data. Projections are
for it to remain well anchored at "modestly above 2 percent" this year on
temporary factors and easing to "about 2 percent" in 2019.
     --Wage dynamics:  the country is approaching the 3% growth in wages that
would be expected in an economy operating close to capacity. Elements of excess
capacity in the labor market that remain (youth and women) can add to the
economy's capacity.
     --Sensitivity of the economy to rising interest rates, especially with
regard to household indebtedness: a longer-term issue but the Bank sees signs
that households are beginning to adjust to higher rates andt0 new mortgage
rules.
     Poloz said the Bank is analyzing these four issues in particular as to the
future of monetary policy. He noted that "some forces" within them, such as
household indebtedness "are very long-term."
--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com
[TOPICS: M$C$$$]