MNI POLICY: Data Call For Longer BOC Pause As Oil Weighs

By Yali N'Diaye

     OTTAWA (MNI) - Despite stronger data released on Friday, there are clear

signs that lower oil prices are taking a toll on the Canadian economy and should

allow the central bank to pause longer before its next rate hike.

     In addition, market volatility and the dimmer Federal Reserve outlook on

U.S. growth are adding to the negative risks in favor of slowing the pace of

rate hikes.

     Governor Stephen Poloz said in a recent interview with CTV that data could

either interrupt or accelerate the pace of tightening.

     Data earlier this week, including the three preferred measures of

underlying inflation that ticked down to 1.9% in November, as reported Wednesday

by Statistics Canada, do call for a longer pause than just two months.

     Canada's GDP expanded by 0.3% in October, according to data reported on

Friday, more than the 0.1% gain expected by analysts in a MNI survey. Output

picked up 0.3% in both goods-producing industries and services.

     The BOC also released its quarterly BOS survey Friday, indicating that

business sentiment remains "positive" and capacity pressures "elevated" in most

regions, which would support further policy tightening.

     --OIL IMPACT SHOWS

     However, the central bank, which indicated in its Dec. 5 policy statement

that it was closely watching the "persistence of the oil price shock," got

confirmation Friday that the impact of low oil prices is showing in data, both

at the sector and regional levels.

     Excluding a 1.3% rebound in energy output, particularly a 3.6% increase in

oil and gas extraction after maintenance shutdowns weighed on September's

figures, GDP would have been flat in October. 

     Looking ahead, economists are warning that the November GDP might not

benefit from the energy output rebound recorded in October after the maintenance

shutdowns. Even the BOC acknowledged that "activity in Canada's energy sector

will likely be materially weaker than expected" when it updates its projections

in January.

     In fact, its own survey Friday said the "outlook has weakened" for firms in

the Prairies.

     "Firms linked to western Canadian oil prices and to housing in some regions

expect demand to weaken or remain subdued and sales growth to moderate," the

survey said.

     --HIGH CAPACITY PRESSURES

     That being said, pressures on production capacity remain elevated, which

should keep the BOC on a tightening path, especially with widespread plans to

increase investment and hiring, notably in services.

     Yet, "firms no longer anticipate capacity pressures to intensify," and the

indicator of investment spending on machinery and equipment "receded", albeit

"slightly."

     The BOC left its overnight rate target unchanged at 1.75% in December. Its

next announcement is on January 9, 2019, accompanied by the Monetary Policy

Report.

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

[TOPICS: M$C$$$]