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By Greg Quinn and Anahita Alinejad
OTTAWA (MNI) - The Bank of Canada will set interest rates suited to
a domestic economy running at about full capacity where the main risk is
a "complex" shock from a deepening global trade fight, Deputy Governor
Larry Schembri said in a speech Thursday.
Domestic inflation, economic growth and labor market conditions are
all consistent with an economy "operating close to full potential," and
policy makers "will continue to conduct monetary policy appropriate to
our own circumstances," Schembri said.
The comments outlined the BOC's thinking behind its decision
Wednesday to hold its key rate at 1.75%, surprising investors who
exepcted signals for a cut as the U.S. and China escalate tariffs that
could stall the global economy. Schembri's remarks are some of the
clearest yet to indicate the BOC may stay on hold this year in contrast
to fresh stimulus from the Fed, ECB and Bank of Japan.
"My colleagues and I began our discussions by recognizing that the
data indicate the Canadian economy is operating close to full potential,
the unemployment rate is near historic lows and inflation-our primary
responsibility-is right on target," Schembri said. He also pointed out
that the BOC's key rate is already half a percentage point below the
Fed's benchmark, another nod to the idea Canada's economy has enough
"This solid starting point means the economy has a welcome degree
of resilience to possible negative economic developments," Schembri
said, pointing to inflation at 2%, second-quarter GDP growth at a 3.7%
annualized pace and labor income growing at a 7% pace.
"Our core inflation measures were also around 2 percent in July,
which is consistent with the idea that the economy's output gap is
essentially closed," he said.
Policy makers are paying close attention to trade as the major risk
to the outlook, Schembri said, as well as signs that business investment
and consumer spending have weakened. At the same time, the drop in
global bond yields means households are refinancing the popular
five-year mortgages at even lower rates this year, he said. That is
boosting demand for a housing again after regulators stepped in to cool
signs of speculative buying in Vancouver and Toronto.
The BOC's July foreast for a slowdown in the second half of the
year that remains intact, Schembri said, without laying out a case that
the so-called "output gap" would widen significantly over that time.
While Canada's dollar rose yesterday as investors scaled back bets
on a rate cut, some investors and economists maintain the BOC will act
at the next decision on Oct. 30, citing a global slowdown fed by
esclating tariffs. Schembri suggested the response to that scenario
isn't clear cut for a central bank that has a single target of 2%
"Things could certainly get worse internationally, which would
deliver a complex shock to our economy affecting both supply and
demand," he said.
--MNI Ottawa Bureau, +1-613-314-9647, firstname.lastname@example.org