January 22, 2020 / 4:50 PM / 7 months ago

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

Jan 22 (Reuters) - Below are some key quotes from a news conference by Bank of Canada Governor Stephen Poloz and Senior Deputy Governor Carolyn Wilkins on Wednesday after the central bank held interest rates steady.

POLOZ ON POSSIBILITY OF A CUT:

“I’m not saying that the door is not open to an interest rate cut. Obviously it is, it is open. But it hinges on how the data evolve from here.”

POLOZ ON DOWNSIDE RISKS DISCUSSED IN OCTOBER:

“Some of those downside risks have clearly landed and they’ve crystallized ... now we’re assessing how big they actually are and whether they will continue to get bigger, or last longer, than we’re supposing. So in that context the sense of whether we need an easing of monetary conditions is obviously present in the analysis, but the trade offs are not as simple as it sounds in a mechanical way.”

POLOZ ON WHETHER ANY FUTURE CUT WOULD BE AN “INSURANCE” CUT:

“It would not be a cut against a hypothetical or a possibility ... but it would mean that the forecast was showing, for us, a meaningful shortfall on our inflation target and that we felt compelled to act on it.”

WILKINS ON MORTGAGE STRESS TEST:

“We’ve been very clear that we think that the stress test, B20, has done a very good job of safeguarding the system, and actually safeguarding individuals who are taking on mortgages, so that they can be more confident that they will be able to handle the mortgage, over the life of the mortgage.”

WILKINS ON POSSIBILITY OF CHANGES TO MORTGAGE STRESS TEST:

“When the stress test was brought in, it was brand new, it was put in a time when interest rates were really low. And anybody who’s been doing financial regulation long enough knows that as you see these things at play, you realize that maybe there are some desirable tweaks that could be made.”

POLOZ ON WHETHER THERE IS EXCESS CAPACITY THROUGHOUT PROJECTION HORIZON:

“Yes ... it’s a modest amount, but it’s present.”

POLOZ ON LOW LEVEL OF INTEREST RATES:

“You can tell we are there (near home for the economy) but still with interest rates really low and still with fiscal policy making a significant contribution. So it’s not being done by the private sector economy. So there is still work to be done.”

POLOZ ON MOVES ARE NOT MECHANICAL:

“If the forecast is one in which as we update it, it gets revised down further that would mean a cumulatively larger effect that Caroline just described from Chart 15, so that would put increased downward pressure on inflation, and it wouldn’t wiggle the rate around 2%, it would start to show a little less than 2%, so then you would begin to factor that in. That could be because Q4 was even weaker than we were monitoring, or Q1, or it could move into Q2. it’s the business of dynamics, it’s not just a mechanical thing. Say Q4 were weaker than we expected but the indicators from Q1 were showing the rebound that we were calling for. That means you don’t just go mechanical about it. The momentum goes back to the good side, and that’s a very positive development.”

WILKINS ON REBOUND COMING, MIXED DATA WON’T LAST:

“We see a rebound coming, we don’t think the weakness in mixed data that we saw later last year will be persistent. But it’s important we continue to look at that. At the same time, there’s a tradeoff that you mentioned about vulnerabilities in the housing sector. What those really are with respect to how well we think we can control household vulnerabilities increasing more than where they are today that could mean further down the road a negative shock could make growth slow.”

WILKINS ON HOUSING MARKET STABILIZING:

“The one thing with vulnerabilities is that we do see that they have been stabilizing, the housing market is starting to stabilize in different places and we don’t see the froth and we see more savings than we thought we had given historical revisions. That’s important information.”

POLOZ ON SLOWER INVESTMENT DUE TO GLOBAL TRADE TURMOIL:

“The main channel by which all this turmoil on the trade front has been affecting us, and other countries too, is through the investment channel. Not so much about trade, the fact that trade indicators have slowed a lot is mainly because investment has slowed a lot and investment is a highly trade dependent activity.”

BOC’S POLOZ ON NAFTA RATIFICATION, IMPACT ON INVESTMENT:

“We ought to be able to see now some response from investment. Our BOS (Business Outlook Survey) tells us that companies in Canada are very ready, have been for some time, to invest and the big thing holding them back has been the uncertainty around the future of NAFTA/CUSMA. So if we get that ratification done I think that is going to make a meaningful difference to investment in Canada.”

POLOZ ON HOW THE BANK WOULD EVALUATE THE PERSISTENCE OF A SLOWDOWN, AS MENTIONED IN POLICY STATEMENT:

“Persistence would be measured against its impact on the outlook for inflation ... if the slowdown proved to be more persistent than what we’ve built into that base case, then that downward pressure would become larger, and it’s that downside risk that we compare or measure against the other risks that we would be adding to the system by lowering interest rates and potentially fueling financial vulnerabilities.”

POLOZ ON IMPACT OF TAX CUT:

“This forecast includes the immediate tax cut that the new government put into place ... conservatively on the order of 0.1 percentage points on growth. It’s probably a little bit more than that, but I want to put a number against it because it’s a targeted tax cut as opposed to just a general fiscal stimulus.”

WILKINS ON GROWTH OUTLOOK:

“Given that we expect a pickup in growth in the first quarter and then stronger in the second quarter, the output gap that’s only just opened up starts to close and remains very small. And so it only has a very small drag, expected drag, on inflation over the projection horizon. And at the same time there’s some offsetting factors, including the very small effect of the carbon tax.” (Reporting by Allison Martell, Fergal Smith and Moira Warburton Compiled by Denny Thomas)

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