MNI POLICY:BOC Raises Rate 25bp To 1.75%,Drops Gradual Refrnce>

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 rose from 1.50% to 1.75%, as 

expected: 

     - Apart from raising the policy rate, significant in the October 

Monetary Policy Report is that the Bank of Canada has dropped its 

reference to a "gradual approach". Now, the central bank says that the 

policy rate "will need to rise to a neutral stance" (between 2.5% and 

3.5%) "to achieve the inflation target" of 2.0%. The "appropriate pace" 

of tightening will depend on how the economy adjusts to higher interest 

rates. It will also pay close attention to trade policy developments, 

notably the US-China trade conflict. Overall global growth "remains 

solid" and global financial conditions remain accommodative despite 

recent financial market volatility. 

     - The new USMCA replacing NAFTA reduces but does not remove 

uncertainty for businesses, since it has yet to be ratified and given 

ongoing trade tensions between the U.S. and China. However, following 

the USMCA deal, the BOC revised up business investment and exports 

projections, also reflecting the approval of a liquid natural gas 

project in British Columbia. The BOC now estimates that uncertainty 

around U.S. trade policy will cut the level of business investment by 

0.7% (instead of 1.4%) by the end of 2020. The effect of that same 

uncertainty on Canadian exports is now -0.3% (revised from -0.7%). 

     - The Bank continues to outline an economy operating close to 

capacity. It expects growth to average "about 2%" over the second half 

of this year. It sees annualized GDP growth of 1.8% in the third 

quarter, up from its July prediction of 1.5%, and 2.3% growth in the 

fourth quarter. Canada's economy "has solid momentum," the BOC says, so 

that even with export growth having slowed after a second quarter surge, 

real GDP would expand. Export growth in future would be modest, affected 

by lower commodity prices. The BOC will monitor the extent to which the 

USMCA leads to increased confidence and business investment in Canada. 

It repeated housing is stabilizing. 

     - The growth composition is "more balanced". The Bank says that the 

economy is shifting from dependency on consumption and housing to 

business investment and exports. Business investment is expected to 

expand among machinery and equipment manufacturers, and in computer 

design fields. But the oil and gas sector is expected to show only flat 

investment over 2019-2020. 

     - CPI inflation is projected to decline from 2.7% in the third 

quarter this year to near 2.0% in early 2019, as transitory factors that 

had been pushing it up fade. The BOC sees medium and long-term inflation 

expectations remaining "well-anchored." The chief risk to its inflation 

outlook would be that trade tensions between the United States and China 

"escalate further" with a consequent more severe fallout than now 

projected. The BOC sees inflation only temporarily staying above the 2% 

target as at present, and then remaining close to 2% through 2020. It 

noted core measures remain around 2%. However, wage growth remains 

moderate, although it is expected to pick up in coming quarters. 

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

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