MNI:BOC's Poloz:Unsure About Timing, Pace Of Rate Hikes Needed

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$$$]