Bank of Canada Remains Defiant, Still Doesn’t See Case for Cut

(Bloomberg) --

The Bank of Canada held firm to its narrative that it won’t be in any rush to cut interest rates unless it sees clear signs of economic deterioration at home.

In a speech a day after a decision in which the Bank of Canada resisted pressure to open the door to monetary policy easing, Deputy Governor Lawrence Schembri said policy makers began their deliberations this week by recognizing the economy had performed better than expected and was probably running at about capacity.

While acknowledging risks from global trade tensions and the fact other central banks like the Federal Reserve are lowering rates, Schembri said the Bank of Canada will only conduct policy that suits the country’s own economic conditions, which he said are different from those of the U.S. These include borrowing costs that continue to be below U.S. rates, and inflation in Canada that is higher.

“The Bank of Canada will continue to conduct monetary policy appropriate to our circumstances,” Schembri said in Halifax, Nova Scotia.

The Bank of Canada’s reluctance to signal a greater willingness to cut rates is making it an outlier as counterparts around the world ease policy. Investors and analysts had expected more dovish language this week that would have paved the way for some easing later this year.

Swaps trading suggests markets are still anticipating as many as two cuts over the next 12 months. But in his speech, and later at a press conference, Schembri gave no indication officials have been considering lower rates.

For one, the Canadian data have surprised positively, and stronger than expected growth in the second quarter means the economy is operating close to its capacity, Schembri said.

“This solid starting point means the economy has a welcome degree of resilience to possible negative economic developments,” said Schembri, who is one of five members on the Bank of Canada’s governing body that decides on policy.

Another factor is that mortgage interest rates in the country have already been falling -- even with the policy rate steady -- because of global conditions in bond markets.

There is also little indication officials believe the U.S.-China trade war -- as bad as it is -- will cause an outright global recession. The recent drop in global bond yields is less an indicator of recession and more a sign investors see weaker long-term growth, Schembri said.

Schembri also spent a lot of time in his speech highlighting how inflation in Canada looks to be well-behaved, and would be expected to accelerate if policy makers allowed the economy to grow faster than its capacity.

Underlying inflation pressures have been hovering around 2% since end of 2017, which is consistent with an economy operating close to its potential output over that time, Schembri said.

(A previous version of this story was corrected to say inverted yield curve may not be a sign of recession)

To contact the reporters on this story: Theophilos Argitis in Ottawa at targitis@bloomberg.net;Erik Hertzberg in Ottawa at eschmitzhert@bloomberg.net

To contact the editors responsible for this story: Theophilos Argitis at targitis@bloomberg.net, Chris Fournier

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