MNI PREVIEW: BOC Awaits More Data, Still Sees Next Move As Up

By Yali N'Diaye

     OTTAWA (MNI) - The Bank of Canada is widely expected to leave its policy

rate unchanged Wednesday, with investor focus on whether the statement hints at

staying on hold for longer than markets are anticipating.

     Governor Stephen Poloz has made clear the path forward is still towards

higher interest rates, but that more data, especially when it comes to housing,

are needed. The path back to neutral interest rates was "highly uncertain", he

said on a Feb. 21 speech, and any appearance of that phrase in the March 6

statement would be significant.

     The last statement Jan. 9 tied the pace of tightening to developments in

oil markets, housing and global trade policy. While crude oil prices have since

gained some ground, the improvement is unlikely to have been sufficient change

to change the BOC's tentative stance.

     If anything, data has added downside risk to the central bank's growth

projections. In the fourth quarter, real manufacturing sales fell 1.1% after

rising 1.2% in the third quarter, real retail sales were flat despite strong

employment numbers, and real wholesale sales contracted 0.9%.

     --BUSINESS INVESTMENT

     The BOC's view on the non-energy sector, especially business investment,

will be key.

     On the housing front, existing home sales rebounded 3.6% in January, but

this came after three consecutive months of declines. In his speech Poloz said

the Bank wanted more data to assess the health of housing activity, which had

been weaker than it had expected, and indicated he was reluctant to risk

destabilizing the residential property market at a time when household debt

remains elevated.

     The BOC projects annualized real GDP growth of 1.3% in the fourth quarter,

slowing to 0.8% in the first quarter.

     Meanwhile, CPI data released Wednesday showed inflation dipped to 1.4% in

January, below the 2% target. The BOC was already expecting headline inflation

to remain below target for much of 2019, and its preferred measures of core

inflation remained stable, averaging 1.9% in January.

     On the external front, trade tensions initiated by the U.S. remain an

important source of uncertainty, although Poloz stressed it was a two-way risk.

     The current pause at the Federal Reserve could also argue for the BOC to

wait, especially as it expects the lower Canadian dollar to support exports and

non-energy investment.

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

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