July 11, 2018 / 4:27 PM / 4 months ago

HIGHLIGHTS-Bank of Canada's Poloz and Wilkins speak after rate hike

TORONTO, July 11 (Reuters) - Below are some key quotes from Bank of Canada Governor Stephen Poloz and Senior Deputy Governor Carolyn Wilkins in Ottawa, after the central bank raised interest rates.

POLOZ ON THE IMPACT OF AUTO TARIFFS ON INFLATION:

“The short version is that the economy slows down ... but inflation picks up quite significantly, both because 25 percent on cars and so on would affect inflation directly, any model that I know of would predict that the exchange rate would ... depreciate, so for two reasons inflation would be rising.”

“We would need to take all that into account and see what room to manoeuvre their might be to help buffer the economy ... the inflation part would probably dominate that analysis.”

POLOZ ON FLATTENING OF THE YIELD CURVE:

“I don’t interpret the flattening of the yield curve as a warning sign as we would perhaps in more conventional times. Because it is often said that the bond market is the smartest forecaster that there is and I happen think that is probably true. But at the moment it seems to be dominated by an incredibly strong appetite for long product.”

POLOZ ON POTENTIAL AUTO TARIFFS:

“It’s (auto and parts sector) one percent of the economy ... it sounds small but it’s 100 percent of the economy for the affected families. It’s a big percentage of the local economy ... it’s also I think very symbolic ... the auto sector is like motherhood and apple pie or something to the Canadian and U.S. economy, we were agreeing on how to organize auto trade just after I was borne. This is a long history of collaboration in this sector to great benefit to both economies. So if you are agreeing to do something to disrupt all of that I think people would naturally feel much more vulnerable, that they would feel like what’s next, there’d be a major confidence effect. So I think symbolically it would have a very outsized effect on the economy compared to the size of it in the actual arithmetic.”

WILKINS ON EXPORTS:

“When it comes to exports we’ve been surprised so far this year, and so that higher level of exports is something that we’ve already seen and certainly our forecast with respect to growth going forward is very prudent.”

“You have to think that for exports, there is a floor to it, I mean the economy in the U.S. is doing very well, stronger than we thought, and oil prices are higher than they were in April, and so there is a floor to this and we are confident in our outlook given the assumptions that we’ve made so far.”

POLOZ ON INFLUENCE OF POTENTIAL U.S. RATE HIKE: Asked how much of the rate decision was based on economic forecasts and how much on anticipation of a rate hike in the United States: “All if it on part A and none of it on part B, so that’s the simplest answer to your question.”

POLOZ ON THE ROLE OF TRADE ACTIONS IN RATE DECISION:

“The escalation of trade actions was quite a part of our discussions but we agreed very early on that it was not going to be the basis for our decision. But it’s something we need to keep ourselves well informed on, and it’s why I carefully laid out the channels in my opening remarks, because a lot of people don’t understand just how complicated that type of shock is for the economy.”

BOC’S POLOZ ON MARKET EXPECTATIONS:

“I am not really seeing any misunderstandings ... I think that the market has been watching the data very closely as we have and today’s adjustment was certainly highly anticipated. I think that’s just an example of how data dependence should look.”

BOC’S POLOZ ON WHETHER ECONOMY NEEDS STIMULUS TO FEND OFF HEADWINDS:

“I don’t think we know the answer to that yet, it’s a question of, as we have said before, our confidence in the outlook grows a step at a time and it is why we have emphasized so much that we are data dependent.”

BOC’S POLOZ ON HIGHER INTEREST RATES BEING WARRANTED:

“We still believe (the neutral rate) is in that two-and-a-half to three-and-a-half percent zone with inflation at two percent, so that’s why we say that given everything else, how well the economy is doing, it is evident to us that higher interest rates will be warranted. But of course we are not in a position to say exactly how much higher or at what rate we might get there.” (Reporting by Fergal Smith, Allison Martell, Danya Hajjaji; Editing by Amran Abocar)

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