REPEAT: MNI BOC ANALYSIS: Soft GDP, Trade War Support Caution

Repeats Story Initially Transmitted at 16:10 GMT Mar 29/12:10 EST Mar 29

By Yali N'Diaye

     OTTAWA (MNI) - When the contracting GDP is adding to rising fears of a

widening trade war globally, it gives no reason for the Bank of Canada to rush

into a further rate hike during the spring.

     Canada GDP contracted 0.1% in January after rising 0.2% in December, adding

downside risk to the central bank's projection of a 2.5% annualized GDP growth

in the first quarter.

--WATCHING HOUSING

     Another 6.5% decline in existing home sales in February suggests real

estate could remain a drag to GDP, further pushing away the possibility that the

2.5% growth expectation will be met.

     Housing is an area where the BOC is particularly monitoring the impact of

its tightening: a cumulated 75 basis points since July 2017.

     "Strong housing data in late 2017, and softer data at the beginning of this

year, indicate some pulling forward of demand ahead of new mortgage guidelines

and other policy measures," the BOC said in its March 7 policy statement. "It

will take some time to fully assess the impact of these, as well as recently

announced provincial measures, on housing demand and prices."

     Thursday's GDP data, at the minimum, call for more time to assess.

--TRADE WAR FEARS

     In addition, as the BOC is waiting, U.S. protectionist policies have raised

fears of a broadening trade war.

     However, developments regarding the auto sector in the context of NAFTA

renegotiations, which more directly affect Canada, have taken a more positive

turn.

     Still, with the treat of tariffs on steel and aluminum imported to the U.S.

tied to the outcome of NAFTA talks, uncertainty remains front and center, which

should continue to leave the BOC's cautious tone intact.

--WATCHING BUSINESS SURVEY

     Yet the BOC has so far refused to publish any scenario that would result

from one outcome or the other when it comes to NAFTA talks.

     Instead, the central bank assesses the impact of the related uncertainty on

business investment, which is expected to be among the pillars of growth as it

rotates to rely less on housing and debt-fuelled household consumption.

     In January, trade-related uncertainty was expected to reduce the level of

investment by about 2% by the end of 2019, an additional drag of 0.5 percentage

points compared to October's assessment.

     The next Business Outlook Survey to be published April 9 will provide

important input on that front, which could lead the BOC to further reassess the

impact of such uncertainty.

--INFLATION ABOVE TARGET

     While all these factors are combining to support further wait-and-see, the

BOC is also facing an inflation rate that is already above the 2.0% target, with

underlying inflation continuing to trend upward.

     Headline inflation accelerated to 2.2% in February, the highest rate since

October 2014. The range of three BOC's preferred measures of underlying

inflation edged up further to 1.9%-2.1% from 1.8%-1.9% in January.

     To be sure, the 1%-3% range allows some flexibility around the 2% mid-range

target, but the central bank is definitely faced with a dilemma.

     In the current environment, however, it is more likely than not to let

inflation top the 2% target rather than jeopardizing growth.

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