MNI: Trump Tariffs Support BOC Status Quo - Analysts

By Courtney Tower

     OTTAWA (MNI) - Concerns deepen about Canadian-American trade, supporting

market expectations of no change on Wednesday in the Bank of Canada's 1.25%

policy interest rate.

     U.S. President Donald Trump's stated intention last week to impose tariffs

of 25% and 10% respectively on steel and aluminum imports adds to trade risks

that keep BOC Governor Stephen Poloz awake at night. These risks include

heightened U.S. "Buy America" intentions and difficult NAFTA negotiations, while

lowered U.S. business tax rates remove Canada's erstwhile lower taxation

advantage.

     --TWEETS RAISE TENSIONS

     Trump increased concerns Monday with tweets rejecting steel/aluminum

exemptions for Canada unless NAFTA negotiations produce more "fairness" for the

United States.

     Canada is the largest exporter to the United States of both aluminum

(US$6.98 billion in the first three quarters of 2016, according to U.S. data

firm Trading Economics) and steel (US$5.87 billion, all 2016: Canadian Steel

Producers' Association). In an integrated US-Canada economy, Canada takes 50% of

U.S. steel exports, while its steel imports come 59% from the U.S.

     Analysts weigh the moderating but still positive 1.7% fourth quarter growth

in an economy operating at full capacity, against longer-term concerns for

housing, household spending, and business investment, to expect that the BOC

will hold steady on Wednesday but utter a cautious tone.

     --UPCOMING HIKES

     The Royal Bank of Canada expects no change this week but three more hikes

this year totaling 75 basis points, added to the January 25 basis point hike,

assistant chief economist Paul Ferley told MNI. 

     However, some analysts are more conservative, including BMO's Benjamin

Reitzes, who expects two more increases this year. And David Madani of Capital

Economics sees just one more.

     All three agree with the market consensus of no change this week and a

cautious tone in the accompanying statement.

     GDP growth of 1.7% for the fourth quarter and 1.5% for the third is weaker

than the BOC expected but still is about right considering that the economy now

is operating at full capacity, RBC's Ferley told MNI. Over the longer term, he

said, "we think that this moderate rate of growth will persist and remain strong

enough that the BOC will continue to withdraw some of the stimulus" of the low

rate. However, he added, "this assumes that there isn't any widening of trade

protectionism in the United States."

     For the future, Ferley said, "we assume rate hikes once per quarter through

the remainder of 2017, for a rise of 75 basis points all told." With the economy

at capacity, present growth "is about the rate that one should expect: any

higher would risk inflation pressures starting to set in".

     --LONGER TERM WOES

     BMO's Reitzes sees the economy dipping over the longer term, on home-buying

continuing to fall after January's massive 14% slump, on household consumption

and business investment stalling in the face of United States trade uncertainty,

and business competitiveness hurt by U.S. business tax reduction. He expects a

BOC tone of concern Wednesday about trade tensions but no rate response to them.

     David Madani at Capital Economics agreed that recent data has been somewhat

weaker than the BOC haD expected but only somewhat, and is basically positive.

For the longer view, he told MNI, "present data is OK but the outlook is getting

darker and darker." His main concerns are Capital Economics' long-held view that

housing will suffer a considerable correction, and large risks to trade and

business investment from a gloomy trade tensions picture.

     The BOC interest rate announcement will be at 10:00 am ET Wednesday.

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

[TOPICS: M$C$$$]