MNI REVIEW: BOC Stands Pat On Rates, Rejects Insurance Cut

--Bank Keeps Benchmark Policy Rate Unchanged at 1.75%

--Poloz: New Stimulus Still Not Worth Cost, Even As Econ Faces Trade Fights Test

By Greg Quinn

     OTTAWA (MNI) - The Bank of Canada decided against an "insurance"

interest-rate cut on Wednesday, despite a still resilient economy facing a

tougher test from global trade fights, as fresh stimulus could re-ignite dangers

from indebted consumers.

     The decision, combined with a U.S. Federal Reserve rate cut hours later,

means Canada has the highest policy interest rate in the G7 at 1.75%. That could

push up the exchange value of the Canadian dollar and put further pressure on

exports and business investment. 

     Some investors are betting those strains could overwhelm the BOC's concern

about lower rates expanding the ranks of households with debts approaching 500%

of disposable income.

     Policy makers said they will pay close attention to signs that trade

tensions are spreading beyond manufacturing and investment. Dangers from global

trade must be also weighed against the view that inflation will hold close to

the BOC's 2% target through 2021 as the economy inches towards full capacity. 

     "Healthy and fit people can still get sick but they recover more quickly

when they do, and I would just kind of characterize the Canadian economy as

overall in that situation," Governor Stephen Poloz told reporters in Ottawa. "We

are not an island, we are not immune to these global developments, but we think

we are in a good position to cope with whatever comes our way, given that

inflation is on target and unemployment is near an all-time low."

     --INFLATION OUTLOOK

     Lowering rates with inflation seen as stable and on target would be out of

character for the BOC's single mandate of keeping consumer price gains at 2%.

"We definitely talked about what that would look like," Poloz said of an

insurance rate cut. 

     "We start that discussion with inflation on target," he said. "Because

inflation is on target, it kind of gives you that ability to keep it symmetric"

he said of the balance of risks.

     The cost of a rate cut is fueling bidding wars on million-dollar homes in

Toronto and Vancouver, lifting aggregate consumer debts that have grown larger

than annual GDP. Lower rates would also do little to revive exports and

investment curbed by weak energy prices and a U.S.-China trade fight. 

     --HOUSING FROTH

     Housing markets in Canada's major cities are already heating up again as

consumers adjust to tougher mortgage qualification rules imposed at the start of

2018, and Poloz again today mentioned the dangers of that "froth" returning. The

collapse of global bond yields this year has also pulled down mortgage rates and

brought borrowers back into the market.

     Poloz drew a contrast with the three dozen central banks that have added

stimulus this year by saying trade wars carry two-sided risks and there are

limits to how monetary policy can combat any stagflation scenario.

     Canada's economy has "resilience overall" and signs of strength including

faster wage gains, he said and noted the BOC is also watching for changes in

federal fiscal policy after the Oct. 21 election, most likely to boost demand as

major parties campaigned on tax cuts and extended deficit spending. 

     Still, how the BOC keeps the outlook balanced shows the overhanging risks

that could bring a rate cut. The economy's potential growth rate was cut on

weaker investment. That keeps inflation pressure alive as growth turns from

faster than expected this year to lower than expected in 2020 and 2021. 

     --FOREX

     The Ottawa-based central bank's statement added a rare line saying the

Canadian dollar has been stable against the U.S. dollar even with a fall in

prices for exported commodities, and has strengthened against other currencies.

     "Governing Council is mindful that the resilience of Canada's economy will

be increasingly tested as trade conflicts and uncertainty persist," Poloz said.

     For a central bank that rejects giving direct forward guidance, that kind

of language leaves less room to maintain that the economy can power through

without fresh stimulus.

     "The central bank likely has a limited appetite for disappointment," RBC

senior economist Josh Nye wrote in a post-meet research note, adding a rate cut

may come next year. 

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

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