MNI REVIEW: BOC Says Door Open to Rate Cut Amid Slowdown Risk

--Poloz: G7's Highest Rate Remains Appropriate as CPI Still on Target

By Greg Quinn

     OTTAWA (MNI) - Bank of Canada Governor Stephen Poloz said Wednesday the

door is open to an interest rate cut because a recent slowdown has pulled the

economy away from full output and could take inflation off track if it persists.

     "I'm not saying that the door isn't open to an interest rate cut,

obviously, it is, it is open," he told reporters in Ottawa after holding the

G7's highest policy rate at 1.75%. "But it hinges on how the data evolve from

here, because our base case we have a strong belief that this will prove

temporary, but temporary could be longer or shorter."

     Poloz said at the press conference that policymakers debated the merits of

cutting against the risk of igniting record consumer debt loads and tight

housing markets, deciding the current rate remains "appropriate." The BOC had

dropped the word appropriate from its earlier written decision, but Poloz said

people should focus less on that than the overall outlook. 

     "The interest rate that we have today remains appropriate for the

conditions that we see, even though it didn't say that in the press release,"

Poloz said. "But the analysis that goes with that suggests that there is

emerging there some downside risk to the outlook for inflation."

     Canada's dollar weakened after the comments bolstered bets Poloz will cut

later this year as weakness from global trade fights creeps in. 

     Policymakers are tracking whether a recent slowdown becomes "persistent"

after slashing growth estimates for the fourth quarter of last year and the

first part of 2020, Poloz said. The overall dynamics of how the economy evolves

determine if the slowdown is persistent, he said, with policymakers focused on

consumer spending, housing and investment.

     The BOC has held rates where they are since an increase in October 2018 and

hasn't cut them since an oil slump in 2015. The latest decision was a shift from

December when a deputy said there was no reason to match the Fed's three rate

cuts in 2019.

     Canada's economy will nearly stall with 0.3% annualized growth when the

fourth quarter figure is reported, the BOC said, lower than its October estimate

of 1.3%. The forecast for first-quarter growth at 1.3% lags its earlier estimate

of 1.7%.

     Growth will pick up to 2% after that and help keep inflation near the BOC's

2% target, officials said Wednesday, adding household vulnerabilities "remain

elevated." Core inflation measures also still suggest the economy hasn't strayed

too far from its potential-- they were around the highest in a decade in recent

months. 

     The shift to more dovish language came as policymakers saw more evidence

that trade and geopolitical tensions are creeping into Canada's resilient

domestic spending. Recent data suggests slower job growth and consumer spending

are adding to the drag from already shaky exports and investment. 

     "In determining the future path for the Bank's policy interest rate,

Governing Council will be watching closely to see if the recent slowdown in

growth is more persistent than forecast," the Governing Council led by Poloz

said in a one-page written statement. 

     The decision matched the median MNI economist survey expectation for no

change. Several forecasters said afterward the odds a cut have gone from

unlikely to perhaps a toss-up.

     "Economic data would need to be very soft in our view to embark on a new

easing cycle at the March 4th, April 15th or June 3rd meetings -- that is,

before Stephen Poloz leaves his seat as Governor" in June, Laurentian Bank

Securities chief economist and former BOC researcher Sebastien Lavoie wrote in a

research note. "We maintain our forecast that the BOC will stay on the sidelines

in 2020 with a 1.75% overnight rate target for now, acknowledging that today's

dovish statement could turn out to be a game changer at some point."

     Growth could also come in stronger than expected with the fourth quarter

weakened by strikes by UAW auto workers and CN Rail employees that disrupted

production and exports. "The weaker data could also signal that global economic

conditions have been affecting Canada's economy to a greater extent than was

predicted," the BOC said.

     Poloz cautioned that consumer weakness could be overstated because retail

spending through U.S. online retailers like Amazon isn't fully captured in

Canadian data.

     "Quite a lot has happened during the past three months. Global economic

growth appears to have bottomed. At the same time, however, indicators of the

Canadian economy have turned decidedly mixed," Poloz said.

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

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