MNI POLICY: Text of Poloz BOC Press Conference Statement

By Greg Quinn

     OTTAWA (MNI) - Following is the text of Wednesday's press conference from

BOC Governor Stephen Poloz and Senior Deputy Carolyn Wilkins: 

     "Good morning. Senior Deputy Governor Wilkins and I are glad to be here to

answer your questions about today's interest rate announcement and our Monetary

Policy Report (MPR). Before turning to your questions, let me briefly summarize

the substance of Governing Council's deliberations.

     You will recall that in October we were most occupied with the

deteriorating global outlook. We could see clearly that this was affecting

Canada's economy too -- not only through exports and the manufacturing sector,

but also through the effects of heightened uncertainty on firms' investment

decisions. However, primarily because of a strong recovery in the housing sector

and a healthy labour market, the Canadian economy was demonstrating good

resilience overall.

     Quite a lot has happened during the past three months. Global economic

growth appears to have bottomed, as shown by an upturn in trade and

manufacturing indicators. Uncertainty remains elevated, of course, and in some

ways has worsened, given rising geopolitical tensions in the Middle East that

had tragic consequences. But the Phase One China-US trade deal and the pending

ratification of CUSMA are positive developments that should lead to lower

business uncertainty over time everywhere, including in Canada.

     At the same time, however, indicators of the Canadian economy have turned

decidedly mixed. The National Accounts data for the third quarter of 2019 showed

a significant slowdown, as we expected, and monthly GDP data have extended that

slowdown into the fourth quarter. We also received a string of disappointing

readings related to the Canadian consumer. Vehicle sales, retail sales more

generally, consumer confidence and job growth all softened. We are now

monitoring fourth-quarter growth of only 0.3 percent. At the same time,

third-quarter investment spending was surprisingly strong. Statistics Canada's

historical revisions showed more growth, more investment from government

infrastructure spending and a higher household saving rate than previously

thought. In short, the Canadian economy last year was in a stronger position

than we previously believed -- operating close to capacity with inflation near

target.

     Much of Governing Council's deliberations focused on how persistent this

recent slowdown in the domestic economy might be. The Bank's outlook is for a

rebound in growth to about 1.3 percent in the first quarter and a pickup to

about 2 percent after that.

     Supporting this outlook is the view that the slowdown in late 2019 may

reflect a greater pass-through from international developments than previously

expected, in which case the recent pickup in global indicators is reassuring.

Another supportive interpretation is that some growth indicators were affected

by temporary factors, including an early winter on the Prairies, pipeline

shutdowns and strikes. A positive reading on employment in December reinforced

this interpretation, along with the understanding that online sales were very

strong this past holiday season and much of these are not captured in Canadian

retail sales data.

     Countering this view would be the possibility that Canadian consumers have

turned more cautious, perhaps in response to global political developments,

elevated household debt, or layoffs in the manufacturing sector and in the

public service in certain provinces. This interpretation was reinforced by

negative consumer confidence data during the fourth quarter, higher estimates of

the household savings rate and soft consumer credit growth. These ingredients

might point to a more prolonged consumer slowdown. This is not our forecast, but

we agreed to monitor the data closely with this downside risk in mind. In this

respect, weekly survey data suggest that consumer confidence may have bottomed

sometime in December. Also, housing remains solid in most regions of the

country, even if it is growing less quickly than it did earlier in 2019.

     In October, we deliberated whether the downside risks coming from outside

Canada were sufficient to warrant a move to lower interest rates. At that time,

we concluded that they were not, given the trade-off we faced against

potentially fuelling increased financial vulnerabilities.

     For this decision, we began the exercise with reduced downside risks coming

from outside Canada, as expected, but at the same time, a crystallization of

some domestic downside risks. After taking these developments on board, our

analysis suggested that overall excess capacity in the Canadian economy has

increased, which will bring a degree of downward pressure on inflation over the

projection horizon. You can see this in Chart 15 of the MPR. Let me make two

comments related to this. First, we believe that the excess capacity is not

uniformly distributed, but is concentrated on the Prairies and in Newfoundland

and Labrador. Second, our estimate of the output gap is based on a partially

updated estimate of the economy's potential. So, there may be more uncertainty

around the current estimate than usual. We will have a more fulsome update in

the April MPR. At the same time, household financial vulnerabilities remain

elevated, although we will be analyzing the positive implications of a higher

household savings rate for those vulnerabilities.

     All things considered, then, it was Governing Council's view that the

balance of risks does not warrant lower interest rates at this time. In forming

this view, we weighed the risk that inflation could fall short of target against

the risk that a lower interest rate path would lead to higher financial

vulnerabilities, which could make it even more difficult to attain the inflation

target further down the road. Clearly, this balance can change over time as the

data evolve. In this regard, Governing Council will be watching closely to see

if the recent slowdown in growth is more persistent than forecast. In assessing

incoming data, the Bank will be paying particular attention to developments in

consumer spending, the housing market and business investment."

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

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