MNI POST-BOC:1Q Tightening Highly Unlikely; But Hikes Not Done

By Yali N'Diaye

     OTTAWA (MNI) - The Bank of Canada virtually shut down any possibility of a

rate hike in the near term, as lower oil prices inflict a "material" impact on

business investment and growth, the housing market suffers greater-than-expected

weakness, and evidence mounts of the toll on global demand of the U.S.-China

trade conflict.

     Nonetheless, the BOC's policy statement Wednesday indicated that the

underlying strength of the Canadian economy continues to call for the policy

rate to rise to the neutral range, which was maintained at 2.5%-3.5%.

     The domestic economy "has been performing well overall," according to the

statement. Growth "has been running close to potential, employment growth has

been strong and unemployment is at a 40-year low," it said, adding that "exports

and non-energy investment are projected to grow solidly, supported by foreign

demand, the [Canada-U.S.-Mexico trade deal], the lower Canadian dollar, and

federal tax measures targeted at investment."

     The projections showed that wage growth has been slowing mostly as a result

of trends in the oil-rich provinces of Alberta, Saskatchewan, and Newfoundland

and Labrador, while it has stabilized in the rest of Canada. "Job churn has been

increasing, which is an encouraging sign for future wage growth," the BOC said

in its Monetary Policy Report.

     The central bank expects spillover effects from oil-related weakness in

household spending and fiscal revenues to other sectors and regions will be

"modest."

     Governor Stephen Poloz indicated during a press conference that the economy

would get back on track in "just a few months." The next interest rate decisions

are on March 6 and April 24.

     Still, the downward revisions to growth estimates mean the output gap

widened to an estimated range of -1% to 0% in the fourth quarter, from -0.5% to

+0.5% in the third quarter.

     After expanding by 2.0% in the third quarter of 2018, real GDP is projected

to grow at an annualized 1.3% in the fourth quarter, revised down by a full

point, and 0.8% in the first quarter of 2019. Inflation, meanwhile, should

remain below the 2% mid-range target for much of this year due to lower gasoline

prices, despite upward pressure from the lower Canadian dollar.

     The BOC, which no longer considers the housing market is stabilizing, will

also likely want more time to better assess the effect of tighter monetary and

macroprudential policies.

     So the current pause in the hiking cycle might last through at least

through April, depending on how oil, housing and global trade policy perform.

     "The policy interest rate will need to rise over time into a neutral range

to achieve the inflation target," the statement said. Poloz added in the press

conference that "over time" was meant to inject some "ambiguity".

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

[TOPICS: M$C$$$,MT$$$$,MX$$$$]