MNI POLICY: BOC Holds Rate, Drops Appropriate as Growth Slows>

By Greg Quinn and Anahita Alinejad

     OTTAWA (MNI) - The Bank of Canada held its key interest rate at 

1.75%, dropping a phrase about borrowing costs being appropriate to say  

it's watching for signs that slower-than-expected growth will persist. 

     Geopolitical and trade tensions remain high and may be spreading 

into Canada's resilient domestic economy, adding slower job growth and 

consumer spending to already shaky investment and exports. The slowdown 

that started in the fourth quarter will extend into the first quarter of 

this year and move the economy away from full output, the Ottawa-based 

BOC said Wednesday. 

     "In determining the future path for the Bank's policy interest 

rate, Governing Council will be watching closely to see if the recent 

slowdown in growth is more persistent than forecast," the Governing 

Council led by Stephen Poloz said in a statement from Ottawa. 

     While Poloz continued his practice of avoiding direct guidance on 

rates, dropping the appropriate phrase takes out a major barrier to a 

reduction later this year. Today's language contrasts with December 

comments that the economy was near full output and policy makers had no 

reason to match Fed cuts even as Canada ended up with the G7's highest 

policy rate. 

     The decision matched the MNI economist median for no change. MNI's 

PINCH model showed investors earlier this week saw a 20% chance of a 

rate cut by April, as weakness in the global economy drags Canada down. 

     Fourth-quarter GDP growth will come in at a 0.3% annualized pace 

instead of the earlier estimate of 1.3%, the BOC said. While that will 

rebound to 1.3% in the first quarter, on average the expansion over that 

period is three-quarters of a percentage point less than expected.

     "Some of the slowdown in growth in late 2019 was related to special 

factors that include strikes, poor weather, and inventory adjustments. 

The weaker data could also signal that global economic conditions have 

been affecting Canada's economy to a greater extent than was predicted," 

the BOC said.

     Growth for all of this year will come in at 1.6%, close to the 

October projection of 1.7%, and 2021 growth was raised to 2% from 1.8%. 

Canada's economy has been "resilient" amid global trade and geopolitical 

tensions, the BOC said. Inflation risks are balanced and price gains 

will remain near its near its 2% target through 2021. 

     Policy makers still pointed to more than half a dozen signs of 

weakness including a buildup of business inventories, comments balanced 

against solid consumer spending supported by tax cuts and population 

growth. The BOC also scaled back mentions of high household debts and 

overheated housing markets that argued against rate cuts. 

     "The effects of global trade conflicts and elevated uncertainty may 

have spread beyond investment and exports, contributing to the 

slowdown in the labor market and weighing on confidence. This may have 

contributed to more cautious behavior by households," the BOC said.

     The economy "until recently, has been operating close to capacity," 

and "the output has widened in recent months," the BOC said. The 

forecast paper estimated the output gap is now between -0.25% and 

-1.25%. In October the gap's range was 0% to -1%. 

     The BOC's December statement said the policy rate remains 

"appropriate" in an economy near full potential and inflation expected 

to hold at the BOC's 2% target.  

--MNI Ottawa Bureau, +1-613-314-9647, greg.quinn@marketnews.com

[TOPICS: M$C$$$,MACDS$]