MNI POST-BOC: Data 'Reinforce' BOC's Conviction Hikes Needed

By Yali N'Diaye

     OTTAWA (MNI) - The Bank of Canada left its main policy rate unchanged at

1.50% Wednesday, as was widely expected, but signaled a greater confidence in

the need for higher interest rates ahead.

     While leaving the overnight rate target at 1.50%, the BOC said in its

policy statement that "recent data reinforce Governing Council's assessment that

higher interest rates will be warranted to achieve the inflation target."

However, the BOC emphasized the need to take uncertainty around trade policies

into account.

     In its May 30 statement, the BOC had also expressed greater confidence in a

similar way amid ongoing trade-related uncertainty, but left rates unchanged

that day, while keeping its "gradual approach".

     At the following meeting in July, the central bank delivered a 25 basis

point rate hike. In its July 11 statement, the BOC said it "expects that higher

interest rates will be warranted."

     So September's wording could be a repeat of the May-July sequence, with the

BOC expressing greater confidence Wednesday based on data despite ongoing trade

uncertainty.

     That could set the stage for a rate hike on October 24, especially since

Wednesday's housing and debt assessments suggest that financial stability

considerations are unlikely to be an obstacle to further tightening: the BOC

pointed out the housing market is starting to stabilize while credit growth has

moderated.

     --EYES ON NAFTA

     While the BOC expressed greater confidence in its Wednesday statement, it

stressed the ongoing uncertainty stemming from trade policies and the

renegotiations of the North American Free Trade Agreement.

     The central bank is following those developments "closely," it said, as

tensions remain "elevated."

     By October 24, the BOC will have key information on business investment and

hiring plans through its Business Outlook Survey to be released October 15,

which will also provide insight about the reaction of businesses to trade policy

developments, including mutual U.S. and Canadian tariffs on steel and aluminum.

     --GROWTH SCENARIO CONFIRMED

     Overall, both global and domestic growth developments have been evolving

according to its scenario, the central bank said Wednesday, the same way

developments in May were on track with its April projections.

     Canada's GDP grew at an annualized pace of 2.9% in the second quarter,

compared with the BOC's projection of 2.8%.

     The BOC also highlighted that its expectations of a growth rotation away

from consumer spending and towards exports and business investment is

"proceeding," with the help of a "robust" U.S. economy.

     It is sticking to its anticipation of a growth slowdown in the third

quarter, owing to a drag from energy production and exports. The July Monetary

Policy Report penciled in a 1.5% GDP growth in the third quarter.

     Earlier Wednesday, Statistics Canada reported that the July merchandise

trade gap narrowed to C$0.1 billion, the best performance since the balance

recorded a surplus in December 2016.

     However, in real terms, exports contracted 0.8%, including a 3.0% drop in

energy exports. Total real exports excluding energy were flat in July.

     --INFLATION TO SUBSIDE

     On the inflation front, the BOC looked through the impact of higher

gasoline and airfare prices that sent the headline inflation rate to 3.0%

year-over-year in July, the upper bound of the 1.0%-3.0% target range.

     CPI inflation should move back to the 2% mid-range target in early 2019 as

the impact of past gasoline price gains dissipates, the statement said.

     As expected, the BOC put the emphasis on the fact that core inflation

remains close to the 2.0% target, consistent with the economy operating "near

capacity."

     In addition, pressures coming from wages are moderate despite ongoing

employment gains.

     Earlier Wednesday, Statistics Canada reported that hourly compensation, a

component of the wage-common calculated by the BOC to assess wage pressures,

increased 0.3% in the second quarter, slowing down from 0.5% in the first

quarter.

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

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