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Free AccessMNI POLICY:Pressure Builds on BOC To Stay On Hold All Of 2019
By Yali N'Diaye
OTTAWA (MNI) - Pressure, both external and domestic, has intensified on the
Bank of Canada to leave its policy rate unchanged through the end of this year,
following the example of other central banks, specifically the Federal Reserve.
On the domestic front, inflation remains well below the 2.0% target even as
Statistics Canada reported Friday that total CPI ticked up to 1.5%
year-over-year in February from 1.4% in January. Lower gasoline prices (-11.9%
year-over-year) remained the top downward contributor, and CPI excluding
gasoline rose 2.1% in February, the same pace as in January.
However, the BOC's preferred measures of underlying inflation continued to
show little sign of upward pressure. The average of the CPI-common, CPI-median,
and CPI-trim edged down to 1.8% in February from 1.9% in January
On the activity front, January retail sales published on Friday
disappointed with a 0.3% decline. Sales fell for the third consecutive month, a
first for the series since April-June 1992. However, it was mostly a price story
as real sales, more relevant to GDP, were unchanged with just two categories
declining.
Even on, a flat performance is a disappointment following a flat reading in
December and a modest 0.1% gain in November. Excluding a decrease in autos and
parts, real sales rebounded 0.5% in January, not enough to offset December's
0.6% drop.
While the BOC has called on all policies to play their part, most analysts
see only a limited boost to growth from the measures introduced in the new
federal budget presented on Tuesday. The budget did include measures that partly
offset the tightening of mortgage underwriting rules, by providing ways to
increase the down payment for first-time buyers.
Housing data have remained weak, with existing home sales plunging 9.1% in
February. BOC officials had already stressed the need for more time to assess
the state of the housing market, and the latest data should only reinforce that
view.
On the external front, headwinds to global growth remain strong,
particularly the uncertainty of Brexit and the lack of resolution of the trade
talks between the U.S. and China.
In addition, the Federal Reserve's more dovish tone on Wednesday, when it
left its target federal funds rate at 2.25% - 2.5%, is clearly pressuring the
BOC. Expectations count on exports to support growth going forward, notably with
the help of a lower Canadian dollar.
"Our policy rate is in the range of neutral, the economy is growing at
about trend, inflation is close to target, unemployment is under 4%. It's a
great time for us to be patient and watch and wait and see how things evolve,"
Fed President Jerome Powell said.
At the BOC, the narrative went from the "need" for the policy rate to rise
to the neutral range of 2.5%-3.5%, to an outlook that warrants a rate below
neutral, "with increased uncertainty about the timing of future rate increases."
With the Fed raising the possibility of no more hikes this year, the BOC's
bar to raise its overnight rate target from 1.75% has been lifted higher.
Whether the BOC sticks to its estimate of the neutral range on April 24, when it
updates its economic forecast, will be key.
--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com
[TOPICS: M$C$$$]
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.