Bank of Canada: Global uncertainty to last even if U.S, China strike truce

By Kelsey Johnson

OTTAWA (Reuters) - Global economic uncertainty is likely to persist even if the United States and China end their trade war, and markets could be underestimating the potential impact, the Bank of Canada said on Thursday.

U.S. President Donald Trump said on Tuesday that a deal to end the conflict might have to wait until after the 2020 election.

"Uncertainty is likely to persist even if a deal is reached between the United States and China. And that uncertainty is likely to have a lasting effect," Bank of Canada Deputy Governor Timothy Lane told the Ottawa Board of Trade in a speech.

The Bank of Canada has repeatedly cited trade tensions as the biggest downside risk to both Canada, whose economy relies heavily on exports, and the world.

"The damaging effects of trade conflict are only partly offset by easier monetary policy," said Lane, adding it remained unclear whether market pricing fully reflected the inherent risks from the trade tensions.

Markets have taken a very optimistic approach for some time, Lane later told a news conference later, citing near-record equity markets and very low credit spreads.

"The sense is there's a bit of disconnect between this quite optimistic pricing in the markets and the fact a lot of the macroeconomic news still suggests some adverse developments are quite possible," he said.

The Canadian central bank kept rates unchanged on Wednesday and has remained on the sidelines since October 2018 even as several of its counterparts have eased.

The bank had mused about a so-called insurance rate cut ahead of its October announcement but no such deliberations took place this time round, Lane revealed.

"Cutting rates now in case something might happen in the future could actually set us up for a bigger impact from that shock," he said.

A recent Reuters poll showed a slim majority of economists now expect the bank to hold rates through to the end of 2020.

Lane expressed confidence in the domestic economy which he said remained resilient thanks to a strong labor market and stable inflation.

Recent data has given the central bank more confidence in its growth and inflation outlooks set back in October, he added.

In his speech, Lane reiterated that future rate decisions would be guided by the bank's assessment of the damage done by trade conflicts versus sources of resiliency, notably consumer spending and housing activity, in the economy.

(Reporting by Kelsey Johnson; Editing by David Ljunggren and Chizu Nomiyama)