MNI PREVIEW: Canada's Northern Star Economy Means No Rate Cut

--BOC To hold At 1.75% Wednesday On Resilient Growth As Fed Seen Cutting

By Greg Quinn

     OTTAWA (MNI) - Canada's central bank will buck the trend for interest rate

cuts again Wednesday as the economy powers through the gloom of global trade

fights.

     The Bank of Canada's benchmark rate will remain at 1.75% where it has been

for a year according to the MNI economist median estimate, with many recently

erasing calls for a cut following strength in wages, inflation and building

permits. The decision at 10am ET will come hours before the Fed is expected to

cut for the third time this year, a move that would give Canada the G7's highest

policy rate.

     Trade tensions will remain a key focus of the BOC's statement as they are a

drag on the exports that make up 40% of Canada's GDP and on business investment.

Investors will look for any alteration of the BOC's views that "the current

degree of monetary policy stimulus remains appropriate" and the economy remains

close to potential.

     Output expanded at a 3.7% annualized pace in the second quarter, and even

with the growth rate expected to halve in coming months economic capacity should

remain tight. Core inflation rates are around the highest levels this decade at

an average 2.1% in September, unemployment is the lowest in a generation and

wage growth exceeds 4%.

     The risk of a new market-moving message is larger than usual because the

BOC has been mostly silent through campaigning for the Oct. 21 federal election.

Governor Stephen Poloz has the tricky problem of not being so optimistic he

drives up Canada's dollar and puts more pressure on exporters. Poloz and top

deputy Carolyn Wilkins hold a press conference at 11.15 am.

     "Their commentary will leave the door open for a cut if, as we expect,

global headwinds impact growth in upcoming months," CIBC chief economist Avery

Shenfeld wrote in a research note. "Talking too hawkishly now risks sparking an

unwelcome tightening on trade through a Canadian dollar appreciation."

     Former BOC Governor David Dodge told MNI last week that rate cuts by

central banks like the Fed and slowing Canadian growth could eventually push the

BOC into "reluctant" stimulus.

     Poloz rejects giving forward guidance and in July said that trade wars pose

two-sided risks from tariffs that can slow growth and quicken inflation. Another

way he could give a soft signal is by adjusting the BOC view that apart from

trade tensions, inflation risks are balanced.

     Still, the most likely case is for Canada to remain an outlier by staying

in neutral. As Deputy Governor Larry Schembri said in the last public speech on

Sept. 5, "the economy has a welcome degree of resilience to possible negative

economic developments." There has been little evidence of a breakdown since

then.

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

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