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REPEAT:MNI POLICY: BOC's Pace Could Pause Longer Than Expected

Repeats Story Initially Transmitted at 16:23 GMT Dec 6/11:23 EST Dec 6
By Yali N'Diaye
     OTTAWA (MNI) - The Bank of Canada has voiced its concern about falling oil
prices to the point it could downgrade its growth outlook in January, which
would set the stage for a longer pause than markets had initially expected.
     In fact, BOC Governor Stephen Poloz said Thursday in a speech to the CFA
Society Toronto that the policy rate, which was left unchanged at 1.75%
Wednesday, was "appropriate for the time being," a precision that was absent
from the policy statement.
     And while he repeated the need for rates to rise to a neutral range of
2.5%-3.5%, he added during a question and answer session that we won't really
know what the neutral rate is "until we are there."
     This time around, the central bank actually qualified the lower oil prices
as a "shock", the persistence of which will be an important factor in the
upcoming decisions. The next announcement will be on January 9, when the central
bank provides updated economic forecasts.
     Given the sharp drop in oil prices since the October Monetary Policy report
and oil production cuts, "activity in Canada's energy sector will likely be
materially weaker than expected," the policy statement said Wednesday.
     The central bank also acknowledged that the Canadian economy is entering
the fourth quarter with "less momentum," a tone reinforced by Poloz's comments
Thursday stressing the "disappointing" data.
     In fact, data released Thursday showed that the goods trade deficit widened
more than expected to C$1.2 billion in October, feeling the weight of the drop
in energy prices which drove down exports (-1.2%).
     That being said, if not for the impact of the energy sector, Thursday's
data were more encouraging than the headline number suggested. Non-energy
exports rose 1.6% in October as volumes rose 2.1%, and total export volumes
actually rose 1.2%.
     For the "decidedly data dependent" BOC, this is good news.
     So was the 1.6% increase in real imports of industrial machinery, equipment
and parts in October, a positive sign for investment activity in Canada, which
the BOC expects to boost productive capacity and ultimately exports, along with
strong foreign demand.
     That being said, the U.S.-China trade "war", a term Poloz is not hesitating
to use, also remains a threat to global growth and a key concern of the BOC,
although the central bank continues to stress it is a two-sided risk.
     Unfavorable developments on this front along with a persistent decline in
oil prices could leave the central bank on hold for longer than markets are
pricing in. Markets see a January rate hike as highly unlikely, with the
probability rising in March to reach 50% in April.
     In addition, the central bank expects inflation, currently at 2.4%
year-over-year, to ease more than expected on lower gasoline prices.
     Not to mention that the BOC's own measure of wage growth has not shown much
improvement, with the wage-common published Thursday rising 2.4% in the third
quarter, after 2.3% in the second quarter, still on a slowing trend since the 3%
reached in the fourth quarter 2017.
     In its October MPR, the central bank projected a 2.3% annualized GDP growth
in the fourth quarter, with CPI inflation at 2.3%, expected to fall back towards
2% by the end of March 2019.
     Its assumptions included the price per barrel of Brent at USD80, the West
Texas Intermediate at USD70, and the Western Canada Select at USD35, all higher
than they are today.
     Still, an upside surprise should not be dismissed as the central bank
monitors businesses' reaction to the new government tax incentives in response
to the U.S. tax cuts.
--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com

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