MNI POLICY: BOC Plays Down Hawkish Policy Interpretation

By Yali N'Diaye

     OTTAWA (MNI) - The Bank of Canada's top two officials Tuesday continued to

play down the financial market's hawkish interpretation of the central bank's

decision to drop its "gradual" wording in its communication about future policy,

noting that getting to the neutral rate estimated between 2.5% and 3.0% by the

BOC won't be a "rapid" process.

     When asked whether the changes to the October statement were meant to

signal more frequent rate hikes, Governor Stephen Poloz told the House Committee

on Finance that data dependency remains the key determinant of the pace of

tightening and that the BOC continues to form its judgment at each meeting.

Poloz testified with Senior Deputy Governor Carolyn Wilkins.

     After raising the overnight rate target by 25 basis points to 1.75% last

Wednesday, the BOC said in its policy statement that "the policy interest rate

will need to rise to a neutral stance to achieve the inflation target." This

followed a switch in May from "cautious" to a "gradual" approach. 

     An annoyed Wilkins stressed that "gradual" wasn't meant to be a "code word"

for a rate hike at every other meeting. Poloz added that the reason to drop the

"gradual" wording was to avoid being "locked" into a process with a rate hike

expected every other meeting.

--STILL DATA DEPENDENT

     He repeated the BOC should go neither too fast nor too slow, and that it is

unclear where the actual neutral rate is within the 2.5%-3.0% range. How fast

the BOC will get there will remain data dependent, with a particular focus on

the response of indebted households to higher interest rates.

     Trade actions between the U.S. and China also remain a key concern,

although it is a "two-sided risk for Canadian monetary policy," Wilkins said.

     Still, the officials stressed that the policy rate was still stimulative

and Wilkins added that "this is the time to get back to normal" after years of

very low rates.

     Dropping "gradual" is only removing one form of guidance to provide them

with more flexibility, but given their current analysis of the Canadian economy,

it is more likely an indication of a faster pace than not.

--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com

[TOPICS: M$C$$$]