MNI POLICY: BOC: Virus And Trade Risk To Economy in Good Spot

--Governor Poloz Sees Trade-off With Insurance Cut Now, Debt Hangover Later

By Greg Quinn

     OTTAWA (MNI) - Th coronavirus outbreak adds to global risks that could slow

what has been a resilient domestic economy, Bank of Canada Governor Stephen

Poloz said Thursday, without repeating his view last month that the door has

opened to lower interest rates.

     "It's certainly not a positive to the situation, it's going to cause lots

of things to be lower, travel of course, investment, supply chains disrupted,"

Poloz said at a panel hosted by the Reserve Bank of Australia. "There is

definitely going to be an interruption of economic growth, and how persistent

that is will determine how important it becomes in a macro sense."

     Poloz's comments are in line with Fed officials this week who said it's too

early to say if China's outbreak is a material risk to growth elsewhere, adding

that the SARS situation was too long ago to provide much of a guide for the

outlook. Canada's economy is already weakened from factory exports and

investment curtailed by global trade protectionism, though he avoided the global

wave of rate cuts because consumer spending appeared resilient until the end of

last year. 

     "We begin this story of Canada in a pretty good place, with unemployment at

all-time lows, inflation on target and wages rising, arguably close to 4% per

year, so a pretty resilient kind of starting point," Poloz said. 

     "The global cost of the trade war is now quite significant, it's affecting

Canada of course, certainly in the manufacturing sector, and we are monitoring

whether or not that's beginning to feed through into consumer confidence, to

slow the economy more generally," he said. "We had some signs of that over the

last few months, but that could be temporary."

     --RATE CUT RISKS

     Poloz wasn't asked directly in the panel about whether a rate cut was still

in the cards for Canada. The BOC's policy rate, at 1.75%, is the highest in the

G7, in part because of the risk that lowering it would re-kindle record

household debts and the stretched Toronto and Vancouver housing markets.

     The build-up of household debt has created a sharper trade off between an

insurance rate cut to blunt slow-growth risks against the potential cost to the

economy later from boosting financial vulnerabilities, he said.

     "That's the time-wise trade-off that's active in our thinking now," he

said. "Inflation targeting is a flexible business."

     Fiscal policy could play a more powerful stimulus role against any future

downturn in an era of low interest rates, he said. The economy has been

supported over the last five years by fiscal stimulus, Poloz said. Interest

rates would have needed to go lower in 2015 when they were cut to a near-record

low 0.5% without that helping hand, he said. 

--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com

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