MNI REVIEW: BOC May Have Left Itself Room For October Cut

--Rates Decision Gave No Guidance On Cut, But Trade War May Derail Strong

Economy 

By Greg Quinn

     OTTAWA (MNI) - The Bank of Canada may have left itself room to cut interest

rates next month without the advance warning markets crave, after holding on

Wednesday while saying its focus now is on whether trade fights weaken a healthy

domestic economy.

     Some investors and economists in MNI's survey still call for the BOC's

1.75% rate to be lowered a quarter point at the next meeting Oct. 30, even after

the latest decision affirmed the current setting is "appropriate" amid growing

trade risks. The case for a cut without a clear bias beforehand comes from the

view that a global downturn triggered by a U.S.-China trade war will sideswipe

Canada.

     Governor Stephen Poloz made an unexpected cut in 2015 as energy prices

plunged, and has repeatedly said investors should rely on economic data for

clues instead of looking for coded language from the central bank. The BOC has

still come close to explicit forward guidance with comments that rates may need

to change over time or saying the risks to the inflation outlook are unbalanced.

     Today's statement did say the BOC is revising its economic forecasts before

the October meeting -- something it does anyway -- but this time with a

particular focus on trade tensions. Previously policy makers said they were

keenly focused on the energy industry as well. Again going further than in the

last decision in July, policy makers said the global trade damage is greater

than expected and has led to inverted yield curves in Canada and abroad.

     "The most clear signal is the statement that the next move will hinge on

global developments. Most signals we've been receiving have been unquestionably

negative, and no end to the trade disputes is in sight," Toronto-Dominion Bank

senior economist Brian DePratto wrote in a research note. "Barring a significant

surprise, we still expect an October rate cut."

     One barrier to signaling major weakness in Canada's economy requiring a

rate cut is that Prime Minister Justin Trudeau is expected to announce that a

federal election will be held in mid-October, and policy makers don't want to be

seen to be interfering in politics. There is precedent for a cut during campaign

season, as Poloz lowered in mid-2015, but that was before Donald Trump's attacks

on the Fed.

     There are few chances the BOC can now give forward guidance before the Oct.

30 meeting, with a "Progress Report" speech Thursday by Deputy Governor Larry

Schembri designed to elaborate on the latest decision rather than break new

ground. The only other scheduled public event is the quarterly report on

business conditions on Oct. 22, based on the views of CEOs more than policy

makers. The Bank could of course insert a speech into its schedule over the next

few weeks.

     Economists who see no rate cut this year focus like the BOC did on a

resilient domestic economy. Friday's GDP report for the second quarter showed

annualized growth of 3.7%, the fastest in two years. Inflation in July was also

unexpectedly strong at 2%, right at the BOC's target, in contrast to the

struggles at the U.S. Federal Reserve and European Central Bank to meet their

targets. The BOC unlike the Fed also has a single mandate on inflation and

doesn't need to focus on full employment, although wages have been rising and

unemployment has been at or near record lows this year.

     Some 90 minutes before the rate decision the data went the other way, with

Statistics Canada saying the trade balance swung back into deficit as exports

declined. The July shortfall of C$1.1 billion followed a June figure revised to

a deficit of C$55 million from an initial surplus reading.

     The BOC's statement left itself room for no one to be totally surprised if

it does move next month. "In sum, Canada's economy is operating close to

potential and inflation is on target. However, escalating trade conflicts and

related uncertainty are taking a toll on the global and Canadian economies."

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

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