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Trade Data Due Over The Weekend

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,