**MNI Post-BOC ANALYSIS: Statement Suggests July Hike

By Yali N'Diaye

     OTTAWA (MNI) - The Bank of Canada's policy statement Wednesday reflected an

even stronger confidence that time has arrived to hike rates, with the central

bank feeling there is no longer the need to be "cautious" but rather "gradual."

     It will remain data dependent and continue to watch the economy's

sensitivity to rising interest rates as well economic capacity, noting the

economy is still operating"close to potential."

     It also estimated that both the global economy and the Canadian economy

have been evolving in line with its April forecasts, although Canada's first

quarter GDP growth "appears to have been a little stronger than projected."

     As widely expected, the BOC left its overnight rate target unchanged at

1.25%.

     --GREATER CONFIDENCE

     The BOC expressed its greater confidence in the need to hike rates in

different ways.

     First, it said, "developments since April further reinforce Governing

Council's view that higher interest rates will be warranted to keep inflation

near target."

     The use of "gradual" over "cautious" also translated the BOC's greater

confidence.

     Key omissions from the statement also indicated the BOC is getting ready to

hike rates. It no longer felt the need to stress that "some monetary policy

accommodation will still be needed." It also dropped the reference to "over

time" in the need for higher rates.

     --HOUSING PICK UP

     While the BOC continues to monitor the response of the economy, especially

the housing sector, to rising interest rates given the still elevated household

debt, notably mortgage debt, it expressed confidence in the housing market's

ability to recover.

     Tighter underwriting standards in place since the beginning of the year

have weighed on home resale activity while prices have also decreased.

     Yet, the BOC sees "solid labor income growth" as supporting the expectation

of a pickup in activity, meaning the bar is higher for the housing market to

justify further wait before hiking rates.

     --INVESTMENT RECOVERY CONTINUES

     Another great uncertainty of the BOC's scenario relates to the impact of

rising protectionism on business investment and exports.

     Clearly, trade-related uncertainty remains and it is "dampening global

business investment."

     However, in Canada, "imports of machinery and equipment suggest continued

recovery in investment."

     And on the export front, sales of goods abroad have been "more robust" than

forecast, while the BOC also cited upside to the U.S. economic outlook.

     --GRADUAL APPROACH

     While the BOC dropped the reference to "cautious" and a rate hike is priced

in by markets for July, it doesn't mean it will accelerate the pace of

tightening.

     The central bank will indeed be "gradual" and data dependent.

     In addition, it indicated that higher inflation led by higher gasoline

prices won't lead the central bank to correct the inflation trajectory as it

"will look through the transitory impact of fluctuations in gasoline prices" on

inflation.

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

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