MNI POLICY: BOC Keeps Rate 1.75% and Warns About Trade Fights>

By Greg Quinn

     OTTAWA (MNI) - The Bank of Canada amplified warnings about 

persistent global trade conflicts that are hurting a domestic recovery 

as policy makers kept their benchmark interest rate at 1.75%.

     The central bank kept in place a key phrase about the degree of 

stimulus being appropriate and continued to leave out any clear language 

about the direction of its next move. The one-page statement included a 

dozen references to risks from trade protectionism and only a few 

mentions of on-target inflation and a recent pickup in growth. The 

decision to hold rates matched the median in an MNI economist survey.

     "The degree of accommodation being provided by the current policy 

interest rate remains appropriate," the statement said. Policy makers 

said they will monitor "the energy sector and the impact of trade 

conflicts on the prospects for Canadian growth and inflation," and 

dropped previous language about being "data dependent." 

     The bank reduced its inflation forecast for this year and next by 

0.1 percentage point to 1.8% and 1.9%, respectively. Both figures are 

below the BOC's 2% target. The economic growth forecast for next year 

was reduced to 1.9% from 2.1% on weakness in foreign trade, while 

stronger domestic spending boosted this year's estimate to 1.3% from 

1.2%. 

     Increased focus on trade risks by Governor Stephen Poloz brings him 

more in line with Fed and ECB policy makers. The warnings follow weeks 

of strong Canadian data that led some investors to scale back bets on 

the need for a rate cut this year. While Canada remains unique among G7 

nations with faster inflation, the BOC's economic forecast Wednesday 

took the rare step of saying its inflation outlook is balanced only 

after trade risks are removed from the picture. 

     "Aside from trade policy, the Bank assesses that upside and 

downside risks to the projected path for inflation are roughly 

balanced," the BOC's Monetary Policy Report said. Inflation is 

projected to "return sustainably to 2 percent by mid-2020."

     Trade tensions will reduce the level of exports by 1.5 percent by 

the end of 2021, compared with an April estimate of 1.2 percent. 

Investment will be reduced by 3 percent over that time rather than the 

2.5 percent estimate in April. 

     The U.S. trade conflict with China is curbing global manufacturing, 

business investment and the prices of commodities that are a major part 

of Canadian exports, the bank said. Tariffs imposed in the last two 

years will cut global GDP by 0.6 percent by the end of 2021.

     Canada's economy is "returning to potential growth" the bank said, 

adding that the surge in growth in the second quarter was likely due to 

temporary factors. Growth will slow from the second quarter pace of an 

annualized 2.3 percent to 1.5 percent in the third quarter. Policy 

makers also called a job market where unemployment has been around 

record lows "healthy" and said the housing market is "stabilizing."

     "The outlook is clouded by persistent trade tensions," the bank 

said. "Escalation of trade conflicts remains the biggest downside risk 

to the global and Canadian outlooks."

     The rate decision made no mention of a recent strengthening in the 

Canadian dollar. The economic forecast paper cut the bank's assumption 

for for prices of crude oil -- a major Canadian export -- by 

about $5 a barrel from April. 

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

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