MNI POLICY: Wilkins Says BOC Has Room to Move in Any Downturn>

By Greg Quinn and Anahita Alinejad

     OTTAWA (MNI) - Bank of Canada Senior Deputy Governor Carolyn 

Wilkins said a 1.75% benchmark rate and other extraordinary tools give 

policy makers room to tackle any significant downturn. 

     The global backdrop has worsened because of trade tensions and a 

buildup of riskier corporate debt, Wilkins said Tuesday in the text of 

speech she's giving in Montreal. Consumer debt and housing markets 

remain key domestic vulnerabilities even with recent rule changes that 

have taken some of the heat out of Toronto and Vancouver housing 

markets, she said. 

     Wilkins made no direct reference to the future path of interest 

rates and repeated the view given at the last meeting that a cut wasn't 

worth the cost to financial stability in an economy that was doing well 

overall. She also referred to an October study showing inflation would 

stay in the BOC's 1%-3% target band even in a simulated global trade 

slump. 

     "Our policy interest rate may be relatively low now, but at 1.75 

percent we still have room to manoeuvre," Wilkins said. "And, we have 

other options in our tool kit, such as extraordinary forward guidance 

and large-scale asset purchases."

     The BOC's main projection doesn't include a global or domestic 

recession, in part because central banks have eased in recent months, 

she said. The world economy still faces "immense challenges" such as 

the U.S.-China trade war, and "the global context has worsened," Wilkins 

said.      

     The trade war could cost at least $1 trillion in lost output by 

2021, at a time when total global debt has climbed to three times GDP, 

she said. Debt quality has also declined with half of investment-grade 

corporate bonds sold in the U.S. and Europe carrying the lowest BBB 

rating, Wilkins said. 

     Canada's financial system is "highly resilient" though lenders and 

regulators must guard against careless practices, she said. Consumer 

debt burdens are likely to remain elevated for a long time following a 

boom that pushed up Toronto and Vancouver housing prices by 40% since 

2015, she said. There are also some signs that housing markets are 

heating up again following tougher lending regulations, she said.

     The speech "Financial Stability in an Uncertain World" highlighted 

interactions between monetary policy, markets and the economy. The 

potential for slowdowns that can transmit weakness between the economy 

and markets make it more important to be on guard and to react properly, 

Wilkins said. 

     "In the current context, lowering interest rates could provide some 

insurance against downside risks to inflation. However, this insurance 

would come at a cost in terms of higher household vulnerabilities down 

the road," Wilkins said. 

     "With storm clouds gathering, we can't let our guard down," she 

said. "It is reassuring that should a storm arrive, the Canadian economy 

and financial system are in a good position to weather it." 

--MNI Ottawa Bureau, +1-613-314-9647, greg.quinn@marketnews.com

[TOPICS: M$C$$$,MACDS$]