MNI POLICY:BOC Key Rate Unch,Need Rise To Neutral 'Over Time'>

By Courtney Tower

     OTTAWA (MNI) - Following are the key points from the Bank of 

Canada's interest rate announcement and quarterly economic analysis 

Wednesday, when the policy interest rate remained at 1.75%, as expected: 

     -- While the key BOC rate remains at 1.75%, significant new words 

have been added to the Bank's past assertions that its rate will have to 

reach the neutral range of 2.5%-3.5% at some undefined time. Now, the 

words "over time" have been added. The BOC cited the ever-weaker 

investment profile of the oil sector, a slowed housing market, and 

continued uncertainties surrounding global trade. 

     -- Other than an increasing drag on the economy from a sharply 

weakening oil industry, the BOC sees Canadian economic growth after the 

first quarter this year as being "robust." However, a weak fourth 

quarter 2018 (1.3% annualized) and first quarter 2019 (0.8%) will lead 

to a widening of the output gap. The BOC sees real GDP growth of 1.7% 

for all of 2019, 0.4 percentage points lower than it had previously 

expected. While this temporary slowing will "open up a modest amount of 

excess capacity," it will primarily be in oil-producing regions. 

However, a pickup starts in early 2019, "leading to above-potential 

growth of 2.1% in 2020." 

     -- While the BOC has long expected business investment and exports 

to replace consumption and housing as the chief pillars of economic 

growth, here it charts business investment as contributing 0.5 

percentage points to real GDP growth in 2018 rather than 0.7 percentage 

points as previously expected. For  2019, that contribution drops to 0.2 

points from 0.4% previously expected, rising to 0.4 points in 2020. 

Exports would improve their contribution slightly, to 1.0 point from 0.9 

points expected, in 2018, and would remain at that level in 2019 and 

fall to 0.8 points in 2020. However, the BOC sees business investment 

and exports outside the energy sector as growing steadily over the next 

two years. Exports overall would grow "close to 3% per year" over the 

two years. 

     -- It's largely about oil, for Canada's picture ahead. Canada's 

terms of trade are falling substantially because of lower oil prices, 

weighing on domestic income and wealth in the country at large as well 

as notably in oil-producing provinces. Spillover effects to other  

sectors and regions in Canada "are currently expected to be modest," the 

report said, but it sees an oil extraction investment decline of about 

12% in 2019 compared with its October forecast of a 1.5% decline. 

Employment will be reduced. As mitigation, the BOC said, the lower 

Canadian dollar "will support non-energy exports and employment." 

     -- Canadian CPI inflation is expected to remain below 2% for much 

of 2019,  "owing mainly to lower gasoline prices." It is expected to 

return to around the 2.0% target by the end of the year. Consumption 

growth is expected to moderate slightly and the housing outlook is  

weaker than had been expected. Again, this is largely because of 

"expected weakness in oil-producing provinces."    

--MNI Ottawa Bureau; yali.ndiaye@marketnews.com

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