Central bank holds, cites ‘growing’ risks
OTTAWA A cautious Bank of Canada kept its key interest rate on hold Wednesday as it bought itself more time to monitor mounting trade-related uncertainties out of the United States.
In sticking with its 1.25 per cent overnight target, the central bank blamed recent trade policy changes for the thickening clouds around the economic outlook.
Last week, U.S. President Donald Trump threatened to impose heavy tariffs on Canadian steel and aluminum. The announcement added to an already murky context for Canada that includes concerns over NAFTA’s renegotiation and fears over competitiveness, following corporate tax cuts south of the border.
The prospect of tariffs has created deep concerns in Canada, the No. 1 supplier of both steel and aluminum to the U.S. Ottawa has hinted at retaliatory action, as have the European Union and Mexico, in what could become an allout trade war.
Trump has said that Canada and Mexico might be spared from his plans for a 25 per cent tariff on steel imports and 10 per cent tariff on aluminum imports if they agree to better terms for the U.S. in talks aimed at revising the North American Free Trade Agreement.
The Bank of Canada noted the widening unease around protectionism, without explicitly mentioning the tariff threat.
“Trade policy developments are an important and growing source of uncertainty for the global and Canadian outlooks,” the bank said in a statement Wednesday that accompanied its latest rate decision.
Many experts now believe the central bank will likely wait until the second half of the year before raising the rate again. Some say the next hike might not come until 2019 and at least one economist said Wednesday that, depending how things evolve, the bank could even lower the rate this year.
“If the worst-case scenario of some kind of trade war goes ahead, well, the chances of a rate cut this year are real,” Sebastien Lavoie, chief economist of Laurentian Bank Securities, said in an interview.
“It seems to us that it’s very unlikely the Bank of Canada will be able to raise rates in the first half of this year. If it happens, it will have to be in the second half of this year and that may not even happen.”
Josh Nye, an economist with RBC Economics Research, said it’s unlikely metals tariffs on their own would drastically change the central bank’s thinking about whether it stays on a rate-hiking path.
“But if tit-for-tat measures escalate into a full-blown trade war — and to be clear, we aren’t nearly there yet — the (Bank of Canada) would have to rethink their tightening bias,” Nye wrote to clients.