Good call, Mr Poloz

When Stephen Poloz took over as Bank of Canada Governor from Mark Carney, it seemed for a while that he was a little overwhelmed by the job. His off-the-cuff statements could be alarmingly erratic,  when adding to market uncertainty is the last thing a central bank should be doing.

In the last year or so, Poloz's performance has been much more sure-footed. Although the economy has been underperforming, he has resisted the temptation to cut rate to or below zero, explicitly calling on the new Federal government to do more on the fiscal policy front. Concern over the elevated growth in house prices, especially in Toronto and Vancouver,  has been one of the key factors staying the Bank's hand.

The Bank announced this morning that it is once again keeping its target rate unchanged at 0.5 percent, even as it again cut its near-term growth forecast. It now expects growth of only 1.3 percent for the year, mainly because the vast wildfires in Alberta in May likely led to a reduction in GDP for the second quarter as a whole, although a strong bounce-back is likely in Q3.

There is, of course, one new factor in the outlook: Brexit. The Bank sees only a minimal direct impact from an "orderly" Brexit, which certainly makes sense given the minimal proportion of Canada's trade that takes place with Europe. As this table shows, the UK takes only about 3 percent of Canada's exports, and the entire EU only about 7 percent.

In these circumstances, a rate cut at this juncture would have little effect on the growth outlook, but could well help to drive the housing market to even greater extremes.  That becomes an important consideration in the context of Brexit. In the event that the exit discussions turn rancorous -- or, as seems more likely at the moment, the UK dithers about starting the formal exit process, thereby prolonging the uncertainty -- pressures on the global financial system could begin to mount. Italy's banks are already feeling a severe pinch, and other countries may well follow.

The resilience of Canada's banking system was a saving grace for the country during the financial crisis (do we now have to start calling it "the last financial crisis"??).  It makes no sense for the Bank of Canada to put that resilience at risk by cutting rates now.  That would only encourage further household over-borrowing while doing nothing to improve the growth outlook. If a new crisis develops, the Bank may have no choice but to join in with a round of coordinated rate cuts, but for now, standing pat is clearly the appropriate course of action.