REPEAT: MNI PRE-BOC ANALYSIS: May Hike Unlikely On Uncertainty

Repeats Story Initially Transmitted at 16:00 GMT May 25/12:00 EST May 25

By Yali N'Diaye

     OTTAWA (MNI) - The Bank of Canada is facing higher oil prices and the

prospects of a stronger-than-projected first quarter GDP growth, but given the

failure to reach an agreement on NAFTA, the same sources of uncertainty are

making a rate hike next week unlikely.

     Since the last interest rate decision on April 18, BOC officials have sent

few signals of a changing picture, reaffirming that U.S. policies remain a

source of uncertainty.

     The central bank also continues to watch the impact of its cumulative 75

basis point rate hikes since last July on the economy, especially the housing

market, with more clarity expected in the summer. 

     Its assessment of how economic capacity evolves also remains key, and on

that front, it is encouraged that some damage caused by the Great Recession to

capacity is being repaired through business investment, firm entry and stronger

labor market conditions.

     On April 18, the BOC said: "Some progress has been made on the key issues

being watched closely by Governing Council, particularly the dynamics of

inflation and wage growth. This progress reinforces Governing Council's view

that higher interest rates will be warranted over time, although some monetary

policy accommodation will still be needed to keep inflation on target. The Bank

will also continue to monitor the economy's sensitivity to interest rate

movements and the evolution of economic capacity."

     --OIL AND INFLATION   

     On the price front, inflation keeps creeping up, so whether the central

bank still sees the impact of higher gasoline prices on inflation as transitory

will be worth watching on May 30.

     The April 18 Monetary Policy Report assumed the Brent at USD65 per barrel

and the West Texas Intermediate at USD60, about the same as assumed in the

January MPR.

     However, the price of the barrel of Brent increased to USD 73.9 on April

18, from 66.7 at the beginning of the year. Over the same period, the WTI

increased to USD 68.5 on April 18 from USD 60.0.

     Still, in its April statement the BOC considered the impact of higher

gasoline prices on inflation as "transitory."

     On Friday, prices fell back on headlines that OPEC and Russia were said to

consider boosting oil supply. Still, the Brent was around USD 76.5 per barrel

Friday midday and the WTI around USD 68.7. 

     In April, headline inflation was 2.2%, but excluding gasoline, it was 1.7%.

That being said, underlying inflation firmed again, with the range of the BOC's

three preferred measures of inflation ticking up to 1.9%-2.1% from 1.9%-2.0%.

     --WAGE GROWTH PROGRESS

     Meanwhile, while average hourly wage growth for permanent workers had

stabilized at 3.1% in March and February, the latest available at the time of

the April 18 BOC decision, down from 3.3% in January, according to the Labor

Force Survey, it picked up again to 3.3% in April.

     In addition, while the headline number showed a 1,100 employment drop in

April, full-time employment was still up 28,800 after rising 68,300 in March.

     Such numbers confirm progress on the wage front, which, combined with

above-target inflation and a possibly stronger-than-expected first quarter GDP

growth based on analysts' forecasts, should leave the BOC confident the

normalization should continue.

     --SOURCES OF UNCERTAINTY

     Still, the central bank has yet to feel comfortable it has enough clarity

on the reasons for the housing market slowdown and it expects to have more in

the summer in its effort to assess the impact of its rate hikes on the economy.

     In addition, with the failure to reach a NAFTA agreement, uncertainty about

U.S. trade policy should leave the BOC on the cautious path.

     Deputy Governor Lawrence Schembri stressed again on May 16 that

"uncertainty about U.S. trade policy currently weighs on business investment and

export growth."

     So the BOC will likely want to wait until July, when the housing picture is

clearer, before hiking rates.

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