BoC’s Schembri: Would consider rate cut if excess supply began building

Bank of Canada Deputy Governor Lawrence Schembri is crossing the wires still, speaking to a business audience in Halifax, Nova Scotia, now saying that there is sufficient stimulus provided by current policy rate and sees the policy rate as ‘sufficient’ to offset global risks.

• Would consider rate cut if excess supply began building in the Canadian economy, putting downside pressure on inflation.

This follows what he said earlier, that the current degree of monetary policy stimulus remains appropriate adding that the governing council will pay particular attention to global developments and their impact on Canadian growth and inflation.

Earlier comments: 

• "In contrast to global economy, Canadian data since July have surprised on the upside."
• "Bank will continue to conduct monetary policy appropriate to Canada's circumstances, and will ground decisions in policy framework."
• "Inflation in Canada has been well behaved and controlled, economy is operating close to its potential."
• "Evidence of close correlation between underlying inflation and output gap bolsters confidence in bank's inflation projections and framework for conducting monetary policy."
• "With already low interest rates, inverted bond-yield curve is more likely a sign that investors foresee weaker long-term growth."
• "Biggest downside risk remains trade war between US and China given Canada's reliance on international trade; escalating tariffs and uncertainty reducing global trade more than forecast."
• "Economy is clearly past its earlier soft patch, with strong labor market and rebounding housing market."
• "National accounts data suggest some of the economy's strength could be temporary, as export strength comes from rebounding shipments of crude oil while imports were surprisingly weak."
• "Recent data point to slower momentum in china and euro area, risk of recession in Germany while US economy continues to moderate but remains solid."
• "Core inflation measures around 2% in July consistent with the idea that the economy's output gap is essentially closed."

FX implications:

Analysts at TD Securities explained that the BoC is caught in a balancing act between data dependence and risk management."

• "With growth slowing, we now believe the Bank of Canada will have to cut by 25 bps in both January 2020 and April 2020."

"We ultimately think that strong wage growth and a shrinking output gap will stay the BoC's hand this year, but our BoC outlook will be especially sensitive to data surprises ahead of the next interest rate announcement on October 30th... If the domestic economic data sours prior to the October 30 BoC meeting, we will be forced to re-evaluate the expected timing for the BoC to ease."