MNI PREVIEW: BOC To Keep Highest G7 Rate,Output Near Potential

--Solid Core Inflation and Low Unemployment Keep Economy Near Full Output

By Greg Quinn

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

1.75% on Wednesday as domestic spending keeps the economy close to full

potential and global trade tensions fade, an MNI economist survey showed.

     Economic growth is poised to rebound early this year from a fourth-quarter

pace dragged below 1% by railway and auto strikes and a rupture to a major oil

pipeline. Even with those hurdles unemployment has returned close to record lows

and core inflation is the fastest in a decade, allowing the Bank of Canada to

remain aloof from the wave of monetary stimulus responding to price weakness in

the U.S., Europe and Japan.

     Canada also faces a much different housing cycle, with markets in Toronto

and Vancouver heating up again despite tougher mortgage rules to curb

speculation. The supply of new houses is the lowest in more than a decade, and

Statistics Canada said last month that Vancouver home prices have climbed to

nine times the incomes of their owners.

     The last change in the overnight lending target was its increase in October

2018. This time, all 13 of the economists surveyed by MNI expected the highest

policy rate in the Group of Seven industrial nations to remain unaltered once

again.

     Governor Stephen Poloz said earlier this month he's watching for signs of

housing "froth" and published a new consumer survey showing growing expectations

of faster price gains. He has also stressed the economy is near full potential

even with manufacturing and investment suffering from global trade fights.

     --WEAK EXPORTS

     While risks from shaky consumer finances are ramping up, danger from the

global economy is fading. The U.S. signed a Phase One trade agreement with China

last week and moved to ratify the USMCA trade deal with Canada and Mexico. That

may reverse falling exports and jolt long-delayed investment spending that has

been the weakest part of Canada's expansion.

     "The BOC will maintain an implied neutral bias overall and continue to

weigh trade/investment risks against the housing rebound," Royal Bank of Canada

strategists Mark Chandler and Simon Deeley wrote in a research note Friday.

Poloz may also reference a boost from fiscal stimulus, they said, following

family tax cuts Prime Minister Justin Trudeau introduced last month.

     RBC, CIBC and Scotiabank say the BOC may still cut rates later this year if

weak growth persists.

     One thing to watch for on that front is new language on the BOC's estimate

of the economy's "output gap." Poloz referenced recent data showing stronger

than expected investment and a boost from higher public infrastructure spending.

That suggests more idle capacity that could give the BOC confidence to cut rates

without sparking inflation past its 2% target.

     The decision is due at 10am Wednesday and is followed by a press

conference. Investors pared odds of a cut after the last statement on Dec. 4

said there was "nascent evidence that the global economy is stabilizing" and

affirmed it was "appropriate to maintain the current level of the overnight rate

target."

     There are two other reasons Poloz can stand pat. Canada's dollar has

strengthened without leading to an outcry from exporters that he should respond.

The Fed's signals about moving to the sidelines after three cuts last year also

eases further pressure on Canada's currency from having the G7's highest policy

rate.

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

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

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