Bank of Canada Warns Global Stress Could Affect Domestic Economy

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‘With storm clouds gathering, we can’t let our guard down,’ top central bank official says in speech

Policy makers need to be prepared for the possibility that global financial stress could spill into Canada despite the domestic economy’s overall resilience, the Bank of Canada’s Senior Deputy Governor Carolyn Wilkins said.

Speaking before the International Finance Club of Montreal on Tuesday, Ms. Wilkins said the Canadian economy is performing well, with inflation close to target and the unemployment rate near historic lows. Canada’s high household-debt levels have also stabilized in recent years, she said, and tougher mortgage-financing rules have helped take the froth out of some housing markets.

However, Ms. Wilkins warned that rising risks to the global economy, such as continuing trade conflicts, could pose problems for Canada.

“With storm clouds gathering, we can’t let our guard down,” Ms. Wilkins said. “This is even more important given that high global leverage would amplify any global downturn, especially if it became a recession.”

Canada’s central bank has kept its key interest rate on hold at 1.75% since last year, after raising it five times over a 16-month period. At a policy announcement in late October, Governor Stephen Poloz said officials had considered a so-called insurance cut before concluding the economy was strong enough for the central bank to stand pat.

“We said at our most recent interest-rate decision that taking out insurance wasn’t worth the cost at that time,” Ms. Wilkins said in her speech. She said a rate cut would be costly because it could lead to higher household vulnerabilities, such as consumer debt, in the future.

TD Bank economist Brian DePratto said concern over financial stability means the bar for rate cuts in Canada is higher than it would otherwise be. “We’re left with the sense that the bank still wants to see ‘the whites of their eyes’ in terms of a data deterioration before they take action,” Mr. DePratto said.

In her speech, Ms. Wilkins said the Bank of Canada has room to maneuver should the Canadian economy deteriorate sharply, with options that could include lowering its key rate and applying tools such as forward guidance.

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