Friday, March 22, 2019 - 14:18

MNI POLICY:Pressure Builds on BOC To Stay On Hold All Of 2019

By Yali N'Diaye

OTTAWA (MNI) - Pressure, both external and domestic, has intensified on the Bank of Canada to leave its policy rate unchanged through the end of this year, following the example of other central banks, specifically the Federal Reserve.

On the domestic front, inflation remains well below the 2.0% target even as Statistics Canada reported Friday that total CPI ticked up to 1.5% year-over-year in February from 1.4% in January. Lower gasoline prices (-11.9% year-over-year) remained the top downward contributor, and CPI excluding gasoline rose 2.1% in February, the same pace as in January.

However, the BOC's preferred measures of underlying inflation continued to show little sign of upward pressure. The average of the CPI-common, CPI-median, and CPI-trim edged down to 1.8% in February from 1.9% in January

On the activity front, January retail sales published on Friday disappointed with a 0.3% decline. Sales fell for the third consecutive month, a first for the series since April-June 1992. However, it was mostly a price story as real sales, more relevant to GDP, were unchanged with just two categories declining.

Even on, a flat performance is a disappointment following a flat reading in December and a modest 0.1% gain in November. Excluding a decrease in autos and parts, real sales rebounded 0.5% in January, not enough to offset December's 0.6% drop.

While the BOC has called on all policies to play their part, most analysts see only a limited boost to growth from the measures introduced in the new federal budget presented on Tuesday. The budget did include measures that partly offset the tightening of mortgage underwriting rules, by providing ways to increase the down payment for first-time buyers.

Housing data have remained weak, with existing home sales plunging 9.1% in February. BOC officials had already stressed the need for more time to assess the state of the housing market, and the latest data should only reinforce that view.

On the external front, headwinds to global growth remain strong, particularly the uncertainty of Brexit and the lack of resolution of the trade talks between the U.S. and China.

In addition, the Federal Reserve's more dovish tone on Wednesday, when it left its target federal funds rate at 2.25% - 2.5%, is clearly pressuring the BOC. Expectations count on exports to support growth going forward, notably with the help of a lower Canadian dollar.

"Our policy rate is in the range of neutral, the economy is growing at about trend, inflation is close to target, unemployment is under 4%. It's a great time for us to be patient and watch and wait and see how things evolve," Fed President Jerome Powell said.

At the BOC, the narrative went from the "need" for the policy rate to rise to the neutral range of 2.5%-3.5%, to an outlook that warrants a rate below neutral, "with increased uncertainty about the timing of future rate increases."

With the Fed raising the possibility of no more hikes this year, the BOC's bar to raise its overnight rate target from 1.75% has been lifted higher. Whether the BOC sticks to its estimate of the neutral range on April 24, when it updates its economic forecast, will be key.

--MNI Ottawa Bureau; +1 613 869-0916; email:

[TOPICS: M$C$$$]

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