MNI PREVIEW: BOC to Keep 1.75% Rate on Resilient Economy

Canada's GDP and Inflation Strong Even as Trade Wars Loom

By Greg Quinn

     OTTAWA (MNI) - Canada's central bank will likely hold its key lending rate

Wednesday and policy makers may again resist the global trend of directly

signaling a need for stimulus as the domestic economy so far escapes major

damage from trade wars.

     Governor Stephen Poloz will keep the overnight benchmark rate at 1.75%

where it's been since an increase in October, according to all 12 economists

surveyed by MNI. There hasn't been a rate cut in Canada since 2015 when an oil

crash threatened to pull the economy into recession.

     Canada has absorbed little of the gloom from a U.S.-China trade war or

Brexit, with a GDP report Friday showing a 3.7% expansion, the fastest in two

years and shattering the BOC's 2.3% estimate. Canada is also an outlier, with

inflation at the BOC's 2% target and unemployment near record lows feeding

strong wage gains. Signaling a rate cut now would run against Poloz's statements

that he relies on economic data and could accidentally draw him into a political

campaign ahead of a federal election due in October.

     The MNI Pinch model showed the odds of a September rate cut falling to 7%

on Friday following the strong GDP report, down from 28% a week earlier. The

October chances of a cut declined to 61% from 87% a week earlier.

     "If Governor Poloz wants to wait for more concrete signs of a domestic

slowdown, or further escalation in risks, before acting, investors expecting an

overtly dovish tone next week may be disappointed," CIBC economist Andrew

Grantham wrote in a research note.

     The decision may still include more language on growing trade risks,

following a July statement that amplified warnings without giving a direct

dovish bias. Some investors and economists are betting on a rate cut in October

whether or not Poloz signals one this week, because a global slump could drag

down an economy that relies on the U.S. for three-quarters of its exports. What

also makes October more likely is that the meeting falls a few days after the

time when Canada's election is likely to be held under a fixed election date

law.

     --GROWTH MAY SLIP IN SECOND HALF

     More importantly, the latest GDP headline figure was undercut by signs that

growth will moderate over the rest of the year. Household spending gains were

the slowest in in seven years in the second quarter at 0.5% as automobile

purchases eased -- a sign consumers may be working to rein in record debt

burdens. Exports also won't match the latest 13% jump as trade tensions linger.

Oil shipments that led export gains likely had a one-time bump in production

following cutbacks ordered by the Alberta government late last year when prices

tumbled.

     The Bank's July statement affirmed the degree of stimulus was "appropriate"

even with growth expected to slow in the third quarter, and that policy makers

would monitor developments in trade and the energy industry.

     Even if Donald Trump imposes heavy tariffs on China in the next few weeks,

Poloz suggested at a July press conference that his choices wouldn't be clear.

Poloz said higher tariffs would slow economic growth and boost inflation at the

same time. And unlike the case with the Fed the BOC's single mandate is to meet

its 2% inflation target.

     "We shouldn't I think go into this assuming that central banks can somehow

fix this, if this is what occurs," Poloz said about a major trade war at a July

press conference. "It would be a very difficult place for policy, and my sense

is that the markets aren't really onto the complexity of it."

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

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