Bank of Canada focused on US rather than domestic risks

Bank of Canada Governor Stephen Poloz surprised the markets last week with his admission that an interest rate cut was still “on the table” if one of the Bank’s downside risks became reality. The risks he identified, however, were nearly all US-related, whereas we still think that the Bank is being far too sanguine about the domestic danger of a more severe housing downturn. The latter is why we have long suspected that the Bank will be forced to cut its policy rate to only 0.25% this year, particularly when core CPI inflation has already fallen below the 2% target.