MNI PRE-BOC: While October Hike Likely, Don't Dismiss Surprise

By Yali N'Diaye

     OTTAWA (MNI) - While an economy operating at close to capacity might give

the Bank of Canada plenty of domestic reasons to hike rates at its September 5

meeting, external factors, including uncertainty over the renegotiation of the

North American Trade Agreement, may prompt it to wait.

     But a surprise cannot be ruled out.

     --GROWTH ON TARGET

     Second quarter GDP growth accelerated to 2.9% from 1.4% in the first

quarter, which was revised up from the 1.3% factored into the BOC's projections.

The BOC had expected 2.8% for the April-June period, so the reading does add a

moderate upside risk to the BOC's outlook. But the overall growth picture fits

into the central bank's scenario, which calls for a slowdown to 1.5% growth in

the third quarter, reinforcing the case for it to stick with a gradual approach.

     Governor Stephen Poloz says the bank bases decisions on economic data,

although after July's 25-basis-point hike he also said that rates would have to

rise further to keep inflation near target.

     --HOUSING RECOVERING

     Having raised rates four times in 12 months, the central bank is paying

close attention to the housing sector, which has also faced tighter macro

prudential rules since the beginning of this year.

     There is reason for the BOC to be satisfied. After the fall in sales

activity at the beginning of the year, home resales have recovered, albeit

moderately: to +0.6% in May, +3.4% in June and 1.9% in July. Price growth on a

12-month basis has been slowing, but not collapsing.

     --INFLATION THREAT

     The BOC might be concerned by inflation. Total CPI reached 3.0%

year-over-year in July, the highest rate in seven years, and at the high end of

the bank's 1%-3% target range.

     But Governor Stephen Poloz has already telegraphed what will likely be the

argument in September should the BOC decide to hold its overnight rate target at

1.50%: the three preferred measures of core inflation remain at target, ranging

from 1.9% to 2.1%.

     Average hourly wage growth for permanent workers also slowed to 3.0%

year-over-year in July, down from 3.5% in June, despite ongoing jobs creation

and an unemployment rate as low as 5.8%.

     According to estimates from private-sector analysts, the wage-common, used

by the BOC as a gauge of wage pressures, was little changed in the second

quarter from the 2.3% recorded in the first quarter, which would still leave it

below where it should be at this point of the growth cycle (closer to 3.0%).

     --TRADE UNCERTAINTIES

     Uncertainties related to U.S. trade policies continue to cloud Canada's

growth outlook. Business investment is the key channel through which the BOC

factors in "negative judgment". In the absence of improvement on trade policies,

there is no reason to reduce that negative judgment.

     With Friday's self-imposed deadline by U.S. President Donald Trump to reach

a NAFTA deal looming, the picture could change rapidly. But with so much

volatility surrounding the renegotiations, the central bank might be more

inclined to wait than not.

     --OTHER BUSINESS UNCERTAINTIES

     A Canadian court decision to overrule government approval of the expansion

of the Trans Mountain Kinder Morgan pipeline adds another layer of uncertainty.

     The decision does not mean the death of the project but adds hurdles that

could unsettle investors in Canada's energy sector.

     Overall, while domestic data would justify a rate hike in September, the

BOC might want to wait until October for more clarity. By October 24, the

Federal Reserve meeting will have taken place, and the BOC's Fall Business

Outlook Survey will be out, providing perhaps the best insight into Canadian

companies' response to uncertainties.

     Yet the possibility of a September hike should not be entirely dismissed.

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

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