MNI PREVIEW: BOC to Hold At 1.75%, Wary Of Property Market

By Greg Quinn

     OTTAWA (MNI) - Canada's central bank will keep its key interest rate

unchanged on Wednesday despite the possible effects of a global trade war on

growth amid concerns that easier monetary policy would re-ignite risky household

borrowing.

     The target rate on overnight loans will remain at 1.75%, where it's been

for more than a year according to the median of economists surveyed by MNI. The

decision is due at 10:00 am in Ottawa.

     Policy makers have said the cost of an "insurance" cut must be weighed

against signs that households carrying record debt loads are again stretching

the limits of the Vancouver and Toronto property markets. While Governor Stephen

Poloz said at the last meeting that the economy's resilience will be tested in

the second half, a report Friday showed GDP growth matched the central bank's

forecast of 1.3% in the third quarter, suggesting output remains close to full

capacity.

     With the BOC setting a low bar on fourth quarter growth at 1.3% again,

investors say any chance of a rate cut will be pushed into the middle of next

year.

     The economy could also show improvement, after companies gave a rare boost

to investment in the third quarter and trimmed elevated inventories, signaling

they need to expand production to keep up with demand. This makes it unlikely

the BOC would modify its key phrase from the last decision, when it described

the level of rates as "appropriate." Poloz said last time he was watching for

evidence that trade damage was spreading beyond manufacturing and investment,

and rising capital spending suggests that isn't happening.

     --INFLATION ON TARGET

     In contrast to the situation facing the Fed and the ECB, Canada's inflation

rate has been just on the central bank's target of 2% for much of this year, and

recent reports suggest surprising weakness in wages is finally easing after a

long period of rock-bottom unemployment.

     Governor Poloz, who has called monetary policy a risk-management exercise,

may also soon have some relief from looser fiscal policy, with Justin Trudeau's

new minority Liberal government likely to introduce more deficit spending in the

next few months. The prime minister needs opposition support to stay in power

and most of those lawmakers campaigned ahead of October's elections, like the

Liberals, on cutting household taxes.

     While exports were weak in the third quarter, Canada may get a boost if the

U.S. Congress ratifies the United States-Mexico-Canada Agreement in the next few

months, with Democrats saying they are seeking only minor changes. Exporters are

also getting a break from a stable Canadian dollar, even with the Fed's three

rate cuts this year.

     That leaves what Senior Deputy Governor Carolyn Wilkins called the

"ingredients" of riskier borrowing returning in recent months even after

regulators imposed a new mortgage stress test last year.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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