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Trend Condition Remains Bearish

Repeats Story Initially Transmitted at 20:50 GMT Mar 2/15:50 EST Mar 2
By Yali N'Diaye
     OTTAWA (MNI) - A weaker-than-expected fourth quarter GDP growth and revived
protectionism fears in the wake of U.S. President Donald Trump's announcement of
new steel tariffs to come could seal the Bank of Canada's status quo next
     The central bank last raised its overnight rate target to 1.25% in January
     While Canada's economic growth did accelerate to 1.7% in the fourth
quarter, as reported Friday by Statistics Canada, it was less than the 2.0%
expected by analysts in a MNI survey, and more importantly, less than the BOC's
own 2.5% projection.
     In addition, with the third quarter GDP growth rate revised down to 1.5%
from 1.7%, the slowdown in the second half of the year was more pronounced than
     On the external front, if anything, developments since Thursday are likely
to reinforce the central bank's cautious approach, helping seal a status quo
next Wednesday.
     "The prospect of a notable shift toward protectionist global trade policies
remains the most important risk surrounding the outlook," the BOC repeated in
its January Monetary Policy Report.
     On Thursday, Trump announced his plan to raise tariffs on imported steel
and aluminum, which sent stocks spiraling down and drew strong negative
reactions at home and abroad, including in Canada.
     "As the number one customer of American steel, Canada would view any trade
restrictions on Canadian steel and aluminum as absolutely unacceptable," said
Canada Foreign Affairs Minister Chrystia Freeland.
     On Friday, Trump's comments further exacerbated fears of an international
trade war.
     "When a country (USA) is losing many billions of dollars on trade with
virtually every country it does business with, trade wars are good, and easy to
win," he said in a tweet.
     Yet the BOC has made clear the protectionism threat, including uncertainty
related to the North American Free Trade Agreement renegotiation won't prevent
it from tightening further if data justify it.
     But data since January 17 would make it hard to justify a rate hike at this
     In addition to Friday's disappointing fourth quarter GDP figures,
Statistics Canada reported Wednesday that businesses capital spending intentions
on non-residential construction and machinery and equipment are up just 0.8% for
this year, and it will be led by the public sector.
     In the private sector, businesses anticipate to reduce spending by 1.1%
from 2017, which would be the fourth consecutive decline.
     Against this backdrop, a cautious approach would equate to further
wait-and-see, giving more time to the BOC to assess its recent rate hikes impact
on the economy, especially the housing market, which is also adapting to tighter
underwriting standards in effect since January 1st.
     Another input came from the fiscal side this time, as the government
presented the 2018 budget Tuesday.
     But on that front, the overall federal deficit and debt trajectory was not
changed since the Fall 2017 update, meaning the fiscal side of the policy mix
remains the same. 
     The federal budget deficit is expected to be C$19.4 billion for
FY2017-2018, compared to C$19.9 billion last fall. The gap is expected to narrow
to C$18.1 billion in FY2018-2019, compared to C$18.6 billion.
     Still, wages and underlying inflation have been maintaining an upward
trend, which will keep the central bank on a tightening path.
     While total inflation drifted further away from the 2% target in January,
when it declined to 1.7% from 1.9% the previous month, it had been anticipated
by the BOC.
     In addition, the range of three BOC's preferred measures of underlying
inflation edged up to 1.8%-1.9% from 1.6%-1.9% in December. CPI-common picked up
to 1.8% from 1.6%, the largest gain since April 2012. CPI-trim and CPI-median
were steady at 1.8% and 1.9%, respectively.
--MNI Ottawa Bureau; +1 613 869-0916; email: