MNI REVIEW: BOC Takes Hikes Off Table For Longer

By Yali N'Diaye

     OTTAWA (MNI) - The Bank of Canada shifted to a more dovish tone at its

meeting Wednesday, saying that the economic outlook now warrants interest rates

below neutral levels, and removing a reference to the need for rates to reach

neutral over time.

     "With increased uncertainty about the timing of future rate increases,

Governing Council will be watching closely developments in household spending,

oil markets, and global trade policy," the BOC said after the meeting, referring

to a "mixed picture" from economic data.

     "Governing Council judges that the outlook continues to warrant a policy

interest rate that is below its neutral range," it said, as it left its

overnight rate target unchanged at 1.75%, as was widely expected. On Jan. 9, it

had said that "the policy interest rate will need to rise over time into a

neutral range to achieve the inflation target."

     It stopped short of giving any new estimate for the neutral range, which

will now provide a focus for investors in the April 24 Monetary Policy report.

     --DISAPPOINTING GROWTH

     The central bank had expected GDP growth to slow to an annualized 1.3% in

the fourth quarter of 2018 and 0.8% in the first quarter of this year, owing to

lower oil prices. But the BOC is now less confident that the slowdown is

temporary.

     In the last two months of 2018, Canadian GDP decreased for two consecutive

months for the first time since February-March 2016. While GDP contracted by

0.1% in both months, it edged up by 0.1% excluding energy in December.

     Overall GDP rose just 0.4% on an annualized basis in the fourth quarter of

2018, the slowest rate since the second quarter of 2016, with declines in

business investment and exports. Households' contribution to growth, at 0.4

percentage point, was the smallest since the second quarter of 2012.

     Household consumption is slowing faster than the BOC had expected despite

strong employment growth, and exports and business investment have not picked up

as expected. The BOC warned Wednesday that it appears "the economy will be

weaker in the first half of 2019 than the Bank projected in January."

     --NEEDS TIME TO ASSESS

     "Given the mixed picture that the data present, it will take time to gauge

the persistence of below-potential growth and the implications for the inflation

outlook," the BOC said Wednesday.

     Given that core inflation remains around 2%, and temporary factors should

keep total inflation below 2% for much of 2019, it should have time to wait, as

it observes household spending, oil markets and global trade policy.

     Despite progress in U.S.-China talks, the trade conflict between the two

countries is still "weighing on global demand and commodity prices." It is

difficult to dissociate the "confidence effects from other adverse factors," the

statement said.

     "Many central banks have acknowledged the building headwinds to growth,"

the BOC said.

--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com

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