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

By Yali N'Diaye
     OTTAWA (MNI) - On the surface, the Bank of Canada Business Outlook Survey
and Statistics Canada's GDP data Friday showed a positive picture of the
Canadian economy, but behind the headlines they indicated that lower oil prices
are taking a toll, which should drive the central bank to hike later rather than
     Canada's GDP expanded by 0.3% in October, 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 supports an ongoing policy tightening.
     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 its impact is showing in data, both at the sector and
regional levels.
     If not for a 1.3% rebound in energy output, including a 3.6% increase in
oil and gas extraction after maintenance shutdowns weighed on September's
figures, GDP would have been flat. This means that instead of output recovering
from a 0.1% contraction in September, it slowed to flat in October after
expanding 0.2% the previous month.
     Looking ahead, economists are warning that the November GDP might not
benefit from the energy rebound recorded in October in the aftermath of
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.
     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
     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 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.
     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
--MNI Washington Bureau; tel: +1 202-371-2121; email:
[TOPICS: M$C$$$]

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