MNI PRE-BOC: Softer CPI, Retail Sales Won't Prevent Oct Hike

By Yali N'Diaye

     OTTAWA (MNI) - The Bank of Canada is set to increase interest rates by 25

basis points Oct. 24, with the boost to economic confidence from a trade deal

with the U.S. and Mexico outweighing softer-than-expected inflation and retail

sales data published Friday.

     While a successful trade deal was already included in the central bank's

base case scenario, it is likely to reduce or eliminate the negative effect on

GDP from uncertainty on business investment and exports, boosting confidence in

the need to boost the overnight rate target from 1.50%.

     BOC Governor Stephen Poloz says the bank will be guided by incoming data as

it gradually raises interest rates towards a neutral level. Friday's added

little to the hawkish case, although the fall in inflation to 2.2% from 2.8%, as

transitory pressures from gasoline, air fares and travel tours eased, was in

line with the BOC's expectation for the measure to close in on the 2.0% target

by early 2019.

     Upward pressure on underlying inflation subsided, although core measures

remained at target, as the three preferred gauges of core inflation moved down

to a range from 1.9% to 2.1% year-over-year.

     --RETAIL SALES

     Statistics Canada also reported Friday that retail sales contracted by 0.1%

in August, with volumes down by an even bigger 0.3%.

     This slowdown also fits into the BOC's economic scenarios, with the Bank

expecting economic expansion to rotate away from consumer spending.

     Average hourly wage growth for permanent workers slowed to 2.2% in

September, the lowest since September 2017. The BOC already deemed the pace of

wage growth to be "moderate" in its September statement.

     More positive data came from elevated capacity utilization rates and

Business Outlook Survey results, which showed a rebound in the investment

indicator to a "high level", with most businesses planning to expand capacity

rather than limiting spending on maintenance.

     The survey was conducted before the trade deal was announced. The survey

also showed firms remained "optimistic" about export demand.

     Among other factors that might be considered by the BOC is October's

legalization of cannabis. Statistics Canada estimates the size of the cannabis

industry at C$3.0 billion in 2017, the same as the beer industry and larger than

the tobacco industry. Spending on legal cannabis is expected to range from $816

million to $1.0 billion in the fourth quarter.

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

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