September 5, 2019 / 3:56 PM / 14 days ago

UPDATE 3-Bank of Canada says economy resilient, U.S.-China dispute may drag on

(Recasts with comments from deputy governor)

By Kelsey Johnson

OTTAWA, Sept 5 (Reuters) - The Canadian economy is showing “a welcome degree of resilience” to negative shocks, a senior Bank of Canada official said on Thursday, even as he suggested the U.S.-China trade war could drag on, hampering global growth.

Bank of Canada Deputy Governor Lawrence Schembri made his comments a day after the central bank held its key rate steady at a time when the U.S Federal Reserve and other institutions have eased borrowing costs.

“As the trade conflict drags on, it’s hard to see that there’s going to be an immediate resolution,” Schembri told reporters on a teleconference following a speech in Halifax, Nova Scotia.

“That would be wonderful if it happened, but you look at how this has evolved over the last few months ... it does raise the issue that the tension could remain at the current elevated level,” he said.

While the escalating trade war remains the biggest downside risk to the trade-dependent Canadian economy, Schembri said in his speech, domestic economic growth has been strong. Meanwhile, Canadian inflation remains around the central bank’s 2% target.

Canada’s economy, he said, “has clearly gotten past its earlier soft patch” thanks to strong labor data and a rebounding housing market.

“This solid starting point means the economy has a welcome degree of resilience to possible negative economic developments,” he told a business audience in Halifax.

Market analysts had been looking for clues about the bank’s thinking on a possible rate cut on Oct. 30, the next scheduled announcement date. On Thursday, Schembri gave little indication an interest rate cut might be imminent.

After he spoke, market expectations of a cut on Oct. 30, as reflected in the overnight index swaps markets, fell to 38.4% from around 50%.

A Reuters poll released last week found economists were divided on whether the bank would cut rates this year or hold off until early 2020.

“Schembri chose to keep the cards close to his chest,” said Avery Shenfeld, chief economist at CIBC Capital Markets.

“Nothing in here to stand in the way of a fourth quarter cut (which the market is pricing in, and the speech doesn’t directly try to refute), but also no hint that October has better odds than December,” he said in a note to clients.

Canada’s central bank has shown no appetite for cutting rates amid steady domestic activity, choosing to sit on the sidelines since last October.

The country is on the brink of a national election campaign, a period during which the central bank traditionally stays quiet. Canadians go to the polls on Oct 21.

On Thursday, Schembri said Canada’s central bank will continue to “conduct monetary policy appropriate to our own circumstances,” adding Canada’s current overnight rate - at 1.75% - is 50 basis points lower than the U.S Federal Reserve’s. (Reporting by Kelsey Johnson; Editing by David Ljunggren and Tom Brown)

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