Bank of Canada senior deputy governor says global economic picture has worsened

MONTREAL — The global economic picture has worsened, increasing risks to global growth and chances of financial stress that could spill over into Canada, the senior deputy governor of the Bank of Canada said Tuesday.

In a speech to the International Finance Club of Montreal, Carolyn Wilkins said the Bank of Canada isn’t predicting a global recession, given that global monetary policy conditions have eased in recent months, but noted the U.S.-China trade war is a major concern.

Wilkins also pointed to Brexit, tensions in the Middle East and unrest in Hong Kong and some countries in Latin America as adding to the uncertainty.

“With storm clouds gathering, we can’t let our guard down,” she said.

“This is even more important given that high global leverage would amplify any global downturn, especially if it became a recession.”

Wilkins noted that global debt is higher than it was before the Great Recession, leaving many households, businesses and governments vulnerable.

“It also means that an economic downturn could be deeper than usual and fraught with financial stresses,” she said.

The Bank of Canada kept its key interest rate target on hold last month at 1.75 per cent, but noted its concerns about the global economy at the time.

The decision by the central bank came as other central banks around the world have moved to reduce interest rates and loosen monetary policy in response to concerns about a slowing global economy.

“Our policy interest rate may be relatively low now, but at 1.75 per cent we still have room to manoeuvre. And, we have other options in our tool kit, such as extraordinary forward guidance and large-scale asset purchases,” Wilkins said.

TD Bank senior economist Brian DePratto said the speech Tuesday appeared to be a continuation of the Bank’s dovish-to-neutral tone.

“The bank recognizes that Canada isn’t immune to the challenges affecting global growth, but at the same time, financial stability concerns mean that the bar to rate cuts is higher than it would otherwise be,” DePratto wrote in a report.

“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. Per their last interest rate decision, housing and consumer spending are still the key barometers on this front.”

Wilkins said Canada is ready to face a global storm if one comes and the financial system is in a good position to weather it.

She said Canada has made progress in reducing domestic financial vulnerabilities including household debt and imbalances in the housing market over recent years. However, she added that despite the progress in addressing vulnerabilities, household debt is still elevated.

“We also see that mortgage credit growth and home housing prices have started to pick up again,” she said. “The market has been boosted by a drop in mortgage rates. And the share of new mortgages going to highly indebted borrowers has started to creep up.”

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