MNI PREVIEW:Hot Economy to Keep BOC From Echoing Stimulus Talk

--Trade Risks, CAD Strength Balanced By Faster-Than-Expected Inflation and GDP

By Greg Quinn

     OTTAWA (MNI) - The Bank of Canada will likely keep interest rates unchanged

Wednesday, and policymakers may break with global peers to highlight a strong

domestic economy instead of potential fresh stimulus to ease trade risks.

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

since October, according to the MNI median. Speculation the Fed will cut rates

while the BOC holds helped push Canada's dollar last week to its strongest level

against the U.S. dollar since October, and there is an expectation in the market

that the BOC will not want to add fuel to its currency.

     But, for the BOC, cutting rates now could re-ignite dangerous borrowing and

speculation in the Toronto and Vancouver housing markets -- more than it would

further encourage business spending. At the same time, the BOC's 1.75% rate is

already below the Fed's benchmark and, with Canadian government 5-to-10 year

bond yields more than 25 basis points below the BOC's rate, a rate cut now is

seen as doing little to make it cheaper for companies and consumers to borrow.

     MNI's PINCH model showed a 4% chance of a quarter-point cut in July, down

from 18% a month ago. The odds of a cut by December are 28%, plunging from 67% a

month earlier.

     --SURPRISING STRENGTH

     The BOC raised rates three times last year before shifting to a neutral

stance in March on signs of falling oil production and escalating U.S. trade

tensions. But Canada's economy in recent weeks has delivered surprising gains

and -- while the increases are mostly a rebound from an earlier soft patch --

inflation is already above the BOC's 2% target.

     Inflation is running at a 2.4% pace and the average of the BOC's three core

measures advanced the most since 2012 in May. Gross domestic product grew a

faster-than-expected 0.3% in April on wholesaling and oil and gas production.

May is looking even better thanks to the biggest trade surplus with the U.S. in

more than a decade.

     Those gains are significant because exports and investment have been weak

spots in BOC Governor Stephen Poloz's desired "rotation" of growth away from

consumers carrying record debt loads.

     --OUT OF STEP

     Should the BOC stick with its neutral stance this week despite the

inflation overshoot, it will likely remain out of step with the Fed, ECB and

BOJ, where policymakers are contemplating looser monetary policy.

     The BOC's decision on Wednesday comes with a new quarterly forecast and

some economists anticipate that the central bank could double its second-quarter

GDP growth estimate of a 1.3% annualized pace. There is less optimism, however,

that future growth will be enough to erase the "output gap" the BOC uses to

assess whether overworked companies will start pushing up prices.

     Competing pressures of global trade wars and Canada's recent good fortune

mean investors see little chance Poloz will add language about the need to

change rates. BOC policymakers have already said rates are low enough to offer

some stimulus to an economy needing time to return to full potential.

     Investors above all are looking for any change to this line from the last

BOC monetary policy decision on May 29: "The degree of accommodation being

provided by the current policy interest rate remains appropriate. In taking

future policy decisions, Governing Council will remain data dependent and

especially attentive to developments in household spending, oil markets and the

global trade environment."

     Canada's own trade risks have faded with U.S. President Donald Trump urging

Congress to ratify a new North American pact and lifting tariffs on steel and

aluminum. Of course, any U.S. trade war could slow the American economy and harm

the 75% of Canadian exports that flow south of the border. Trade risks "remain a

major preoccupation for us" Senior Deputy Governor Carolyn Wilkins said in a May

30 speech.

     This week's BOC decision is also the last where Poloz could easily signal

any intention to move before October's federal election. Without any signal this

Wednesday, it means rates could easily be on hold into next year. The decision

is due at 10 a.m. EST followed by an 11:15 a.m. press conference with Poloz and

Senior Deputy Governor Carolyn Wilkins.

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

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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