National Post (National Edition)
BOC HOLDS ON SOURING NAFTA
High household debt also figures into decision
OTTAWA • The Bank of Canada’s decision Wednesday to keep its current overnight rate is led by fears over high household debt and souring negotiations around the North American Free Trade Agreement, both of which could restrict inflation growth and delay future rate hikes.
Interest rates were kept at 1 per cent, a move that was widely expected following rate hikes in July and September. The decision reinforced the more dovish tone adopted by the bank in recent months, running somewhat in contrast to Ottawa’s cheery fiscal update released Tuesday.
The bank said a “pronounced” drop in Canadian housing prices, stronger U.S. GDP growth, rising household debt levels and threats by U.S. president Donald Trump’s administration to shred NAFTA are looming risks to the Canadian economy.
Bank of Canada Governor Stephen Poloz said Wednesday he had met with several Canadian businesses that have considered investing outside of Canada over fears NAFTA talks could crumble.
In particular, he said many companies are weighing whether they should invest in the U.S. as a hedge against souring negotiations over the treaty; others are considering increasing offshore production capacity rather than exporting from Canada.
“Companies are investing less than they would without the uncertainty around NAFTA,” Poloz said.
In its Monetary Policy Report released Wednesday, the BoC said uncertainties over the Trump administration’s trade policies could cause investment to shrink 0.7 per cent in 2017 and 2018.
The bank’s rate decision comes as Canada, Mexico and the U.S. agreed to extend NAFTA talks to March 2018 after failing to complete negotiations within the year. Reports that the U.S. has tabled several hard-nose policies have caused rumblings that the treaty could be scrapped altogether.
While the bank said threats to terminate NAFTA were a risk to inflation, its rate decision did not account for uncertainty around negotiations.
“We simply don’t know enough about what might happen,” Poloz said.
It’s unclear how businesses would react if the treaty were terminated, he said, emphasizing that the Canada-U.S. exchange rate in recent years has often been much wider than the tariffs that would likely fall into place in the absence of the trade agreement.