MNI PRE-BOC: BOC Seen On Hold, Focus On Statement Tone

By Yali N'Diaye

     OTTAWA (MNI) - The Bank of Canada is set to leave its policy rate on hold

next week, after data Friday showed wage growth still slow and youth employment

deteriorating, with attention after its Jan. 9 meeting likely to focus on the

extent to which it acknowledges concerns over global growth, weak oil prices and

financial market volatility in its statement.

     The BOC has already signalled it would revise down its Canadian GDP

estimates, although when it left the overnight rate target at 1.75% on Dec. 5,

it said that there might still be "additional room for non-inflationary growth",

and that the policy interest rate needed to rise into a neutral range to achieve

its inflation target.

     While measures of underlying inflation have remained around 2%, the

mid-point of its target range, growth measures look weak, and the outlook for

oil prices, a key driver of investment, is deteriorating.

     On Thursday, S&P Global Ratings said it expected Brent crude to average $55

a barrel in 2019 and West Texas International $50, compared to the BOC's October

projections putting Brent at $80 and WTI at $70.

     Analysts expect a drag from the oil sector to weigh on fourth quarter GDP,

which the BOC has projected at 2.3% in annualized terms, up from 2.0% in the

third quarter.

     Business investment was already a negative contributor to growth in the

third quarter, partly as a result of slower investment in oil and gas, and the

BOC's Business Outlook Survey released Dec. 21 noted a deterioration in the

outlook for firms in the Prairies, the most exposed to the oil sector.

     --GLOBAL CONCERNS

     Global trade developments are another key concern of the BOC, notably the

ongoing dispute between the U.S. and China.

     But developments since Dec. 5 do not necessarily justify an end to the

tightening cycle.

     The BOC's Business Outlook Survey found that sentiment remains positive,

albeit slightly less upbeat than the "robust" sentiment reported in the Fall.

The survey also found elevated capacity pressures in most regions, an

encouraging sign for business investment ahead, especially following tax

measures introduced in November in response to U.S. tax cuts.

     The BOS also showed that exporters' sales expectations, while weakening,

remain "positive", with most firms anticipating U.S. growth. Real exports rose

1.2% in October, and were up 2.1% excluding energy. The next trade data are due

Jan. 8, the day before the BOC's announcement.

     Continued tightening at the Federal Reserve, even at a slower pace, also

gives room for the BOC to hike without fueling an appreciation of the Canadian

dollar.

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

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