MNI PREVIEW: BOC Seen Staying At 1.75% On Growth Questions

By Greg Quinn

     OTTAWA (MNI) - The Bank of Canada is expected to keep its benchmark

interest rate unchanged Wednesday, with investors seeking clues as to how much

policy makers embrace recent signs the economy is pulling out of a soft patch.

     Governor Stephen Poloz will leave the target rate on overnight loans at

1.75% where it's been since an increase in October, according to market bets and

economists surveyed by MNI.

     The central bank slashed its 2019 growth forecast by half a percentage

point to 1.2% at the last meeting in April, and said for a second time that

policy stimulus is needed.

     GDP growth nearly stalled again in the first quarter of 2019 and the

economy will grow at a 1.3% annualized pace in the second quarter, the central

bank said at its April decision. That kind of weakness is enough to create ``a

modest widening'' of the gap between the economy's performance and its

potential.

     Consumer price inflation advanced 2% in April from a year earlier, matching

the Bank's target, and the BOC's three preferred measures of core prices

averaged 1.9%. That means the economy lacks the momentum needed for Poloz to use

much in the way of hawkish language -- even with a recent record jump in

employment and higher retail sales.

     But recent economic data has come in stronger than expected, and the market

has scaled back expectations for a rate cut this year. The MNI PINCH model on

Wednesday showed a 26% chance of a quarter-point reduction by the December

meeting, down from 43% a week earlier.

     --HIGHER RATE HINTS

     Poloz has hinted he could move back to looking at higher rates again at

some point, something policy makers contemplated as recently as their January

decision. The Governor told BNN Bloomberg TV last week ``the natural tendency is

for interest rates to still go up a bit,'' adding he's unsure about the timing.

     Even if Canada's economy surges later this year, there's little sign that

much monetary policy restraint is needed in a world where other major central

banks have also turned more cautious. The Bank of Canada last month lowered its

range for a ``neutral'' interest rate to as low as 2.25%. On top of that,

inflation is expected to slow in the third quarter on a dip in gasoline prices.

     Investors will also read the one-page statement for clues on whether the

BOC views a recent agreement to end metals tariffs between Canada and the U.S.

as a significant easing of trade tensions. Investment and exports in Canada have

been hobbled by U.S. trade threats, and neither nation has ratified an agreement

to overhaul the NAFTA trade pact that also includes Mexico.

     The BOC has said how much stimulus it offers in the future also depends on

fresh data on household spending and oil markets. Canada's major energy

companies struggled again last year with low prices and transportation

bottlenecks, while consumers carrying record debts are sensitive to any rise in

mortgage rates.

     The rate decision is due for release at 10am EST on Wednesday from Ottawa.

There is no press conference or full economic forecast, though Senior Deputy

Governor Carolyn Wilkins is due to speak in Calgary on Thursday.

--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com

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