REPEAT:MNI POST-BOC:The Bar To Slow Normalization Was Raised

Repeats Story Initially Transmitted at 16:04 GMT Jul 13/12:04 EST Jul 13

By Yali N'Diaye

     OTTAWA (MNI) - A growingly confident Bank of Canada proved this week when

it raised the overnight rate target that while escalating trade tensions remain

the key threat to the growth outlook, data on the Canadian economy is still the

key factor. 

     And when it comes to the health of the Canadian economy, the data provided

a green light as the central bank revised up its second quarter growth forecast

to an annualized rate of 2.8% from 2.5%, while Governor Stephen Poloz said he

was "heartened" by the performance of business investment and exports. 

     But "most importantly, inflation is on target," Poloz said. The BOC expects

the inflation rate to rise to 2.5% in the third and fourth quarters before

returning to the 2% target by the second half of 2019. 

     Not only did the the BOC raise its overnight rate target to 1.50% from

1.25% Wednesday, as expected, it did it with an overall more upbeat tone than

markets had anticipated. 

--MORE CONFIDENT 

     The wording of the policy statement indeed sounded more assertive than in

May regarding the need to raise rates going forward, with the BOC moving from

being reinforced in its view to expecting rate hikes will be warranted. 

     When asked during a press conference whether he felt more confident now

than in May about the need to raise rates, Poloz indicated he was indeed. 

     "Our confidence has grown in the last six weeks," he said. He deemed the

Canadian economy was overall "in a good place." 

--ECONOMIC RESILIENCE 

     Even as household debt remains elevated and mortgage renewals could weigh

more on the economy in 2020 and 2021, "the economy should be resilient to higher

interest rates, provided that labor income continues to grow," Poloz said. 

     So even though the central bank continues to watch the economy's response

to higher interest rates, its comments suggested elevated household debt should

not prevent the normalization process from going forward at a gradual pace. 

     That means it would take more now for the BOC to slow down the

normalization process or pause it for a long time due to financial stability

concerns stemming from household debt, especially since, even at 1.50%, the key

policy rate is still at least 100 basis points below what the BOC considers the

neutral rate (2.5%-3.5%). 

--ILL-SUITED TO COUNTER TRADE 

     The BOC also gave some hint as to how far it is willing to go to counter

the effects of protectionist trade policies: it can provide support in

conjunction with other policies but is unlikely to do the heavy lifting. 

     "Monetary policy by itself could not undo the long-term damage to jobs and

income that could result from rising protectionism," Poloz said. 

     "Monetary policy is ill-suited to counteract all" the effects of

protectionist policies, he added. 

     BOC officials had also made clear they won't adjust policy based on

hypothetical trade scenarios but only based on actual measures, as was done for

the U.S. steel and aluminum tariffs and Canadian and global retaliation, the

impact of which was found "modest." 

     The BOC also factors in uncertainty related to trade through the outlook

for business investment and exports, with the impact now considered more

negative than in April's MPR. 

--TWO-WAY RISKS 

     Poloz also reminded that risks are two ways and that a positive resolution

of NAFTA negotiations, for instance, could unleash investment that is now held

back due to uncertainty. 

     U.S. economic growth could also prove stronger than expected. In addition,

higher oil prices are also providing some buffer to the Canadian economy. The

question going forward is whether the BOC is too optimistic. 

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