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

sooner.

     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.

     --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 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.

     --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."

     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

Report.

--MNI Washington Bureau; tel: +1 202-371-2121; email: kevin.kastner@marketnews.com

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