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--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."
     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 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. 
     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:
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MNI London Bureau | +44 203-865-3812 |