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REPEAT:Analysts:BOC More Cautious, Likely To Hold Rate at 1.0% 

Repeats Story Initially Transmitted at 18:00 GMT Oct 23/14:00 EST Oct 23
By Courtney Tower
     OTTAWA (MNI) - The former widespread expectation of a third Bank of Canada
policy rate hike this year recedes, with almost no analyst seeing an increase in
the 1.0% rate on Wednesday and the ranks diminishing of those who expect one at
the final setting for 2017, on December 6.
     Too many uncertainties, such as NAFTA negotiations that are going badly for
a trade-dependent economy, too many possible prospects that need time to
materialize, such as the effect on high household debt of new housing rules,
leave the Bank of Canada likely to maintain cautious monitoring of data and
events, analysts believe.
     "We expect no change from the Bank on Wednesday and we think it will signal
that it will wait a bit longer for any further hike because of the
uncertainties, particularly with regard to NAFTA and to new housing rules,"
Douglas Porter, chief BMO economist, told MNI.
     "Also, there is some evidence that the economy is losing momentum," Porter
added, citing for instance the disappointing fallback in August retail sales
reported last week. While a month's data does not necessarily make a trend, real
sales dropped by a large 0.7% and CIBC analyst Nick Exarhos sees it "suggesting
another sluggish month for output in August after July's flat reading."
     With third quarter output to pull back from stellar growth in the first
half of this year - +3.7% in the first quarter and +4.5% in the second, far
above BOC's projections - growth is cooling, as the BOC has expected. Analysts
see something like 3% or 3.1% growth for all of 2017, representing a drop down
to the 2% region for the third and fourth quarters, much as the BOC has
predicted.
     Wages have improved somewhat, overall, but price pressures in the economy
remain low. The 1.6% headline annual inflation reported by Statistics Canada
last Friday, the third monthly increase, stays below the 2.0% inflation target
held by the BOC. Core inflation remains low as well. There is no reason to worry
about pending inflationary overheating as yet, CIBC chief economist Avery
Shenfeld notes.
     Governor Stephen Poloz in a September 27 speech reiterated, with added
emphasis, that in the face of many uncertainties the BOC has become
"particularly data-dependent." His data includes, prominently, as he stressed in
that speech, business sentiment as expressed in the quarterly Business Outlook
Survey released last week.
     That outlook represented something of a pullback from the spring survey.
The Bank presented it as still positive, with businesses expecting higher future
sales, more hiring and more investment in plant and equipment, but nevertheless
a pullback.
     As well, there are the various uncertainties that call for a wait and see
attitude, Shenfeld says. For BOC's forecasting, "there's no variable in the
model for 'NAFTA ends,'" he told clients in a commentary. "There's no button for
'new mortgage rules.' There's (sic) no historical precedents that can be used to
confidently measure the growth and inflation impacts of a minimum wage hike as
large as the one Ontario is about to institute (from C$11.60 presently to $14
next January 1 and $15 January 1, 2019)."
     All of that necessary monitoring will mean no change in the 1.0% rate
"until the spring of 2018," Shenfeld says.
     "Given inflation below target and the economy operating close to capacity,
if there is further tightening it will be gradual," Paul Ferley, assistant chief
economist at RBC, told MNI. He sees it quite probable that there will be no hike
this year, perhaps not until sometime up to the end of next year.
     The Bank of Canada has evidently taken on "a more patient bias" of late,
following the two 25 basis point rate hikes earlier this year, and now is in a
"watch and wait mode," Jimmy Jean, senior economist for Mouvement Desjardins,
told MNI.
     "I think they want to assess how the housing market will handle the higher
interest rates that we have seen over the summer and may happen further with the
new 'stress test' rules for all future homebuyers to take effect next January
1," Jean said.
     Other economists see the new rule depressing housing demand by 5% to 10%
once implemented.
     "The economy has come a long way in improving this year," Jean said, "with
employment strong, wage rates starting to accelerate, business optimism
remaining constructive."
     "We are just now on a more sustainable path, and the BOC is likely to take
the time ahead to gain a better idea on where we are going," he added.
--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com
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