MNI PRE-BOC:Set To Leave Rates Unchanged As Biz Invest Weakens

By Yali N'Diaye

     OTTAWA (MNI) - Friday's GDP release was the last important piece of data

before the Bank of Canada's interest rate announcement next week, and despite a

decent headline number, the underlying details of the report likely sealed the

case for holding rates steady, but only temporarily.

     Since the October 24 meeting, the ongoing slide in oil prices has also been

a key element that should put a hold on further tightening on December 5. The

BOC might want to give itself more time to assess the impact of lower oil prices

on Canada's growth and inflation outlook. So far, core inflation has been

holding around 2%.

     Whether the policy statement indicates that the decline in oil prices is

still due to transitory factors will be important as it will show whether the

central bank is considering lowering its growth outlook on that basis. 

     The BOC might also want to take additional time to see how trade tensions

between the U.S. and China evolve.

     The BOC is set to resume its tightening next year from the current rate of

1.75% and a neutral rate between 2.5% and 3.5%. The central bank had dropped its

"gradual" approach in October and is poised to stick to its data dependent

approach.

     Canada's annualized GDP growth slowed to 2.0% in the third quarter from

2.9% in the second quarter, in line with analysts' expectations in a MNI survey,

and topping the BOC's 1.8% projection. However, details showed that the BOC's

growth rotation scenario was challenged at several levels and should give the

BOC cover to hold rates steady at the coming meeting.

     Household consumption expanded by 0.3% over the quarter, its slowest pace

since the first quarter 2015. The contribution to the annualized GDP growth

(1.992% unrounded) from consumption was 0.7 percentage points, about half what

of its contribution was in the second quarter. However, the BOC's scenario was

already based on a consumer spending slowdown, although not as rapidly given the

expectation of rising wages.

     In the BOC's scenario, exports and business investment are expected to

offer an offset to slower consumer consumption. However, business investment

failed to pick up the slack in the third quarter, and instead contracted 1.5%.

Notably, investment in non-residential structures, machinery and equipment fell

1.8%, the largest drop since the fourth quarter 2016, with a deceleration in the

oil and gas sector weighing on investment in engineering structures. Still,

machinery and equipment fell 3.5%, the largest decrease in two years.

     On the export front, the growth rate was just 0.2% in the third quarter

following a strong 3.1% gain in the previous quarter.

     In addition, a surprise 0.1% GDP contraction in September showed the

economy lost momentum, handing off a weak start to the fourth quarter, when GDP

is expected to rebound 2.3%, according to the BOC.

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

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