Central bank warns of fallout from trade fights

OTTAWA — Even with reassuring trade news out of the United States, a senior Bank of Canada official warned Thursday of serious consequences related to steel and aluminum tariffs as he sent signals the bank’s in no rush to raise interest rates.

Deputy governor Timothy Lane said in a speech that the central bank is closely watching the uncertainty surrounding global trade tensions, competitiveness issues and the future of the North American Free Trade Agreement.

But even as he underlined the many significant economic unknowns, Lane also delivered an upbeat message about the health of the Canadian economy and its positive outlook, in general.

Lane’s appearance at the Greater Vancouver Board of Trade came shortly after Canada learned it was getting relief from U.S. penalties on steel and aluminum for an undetermined period. Canada is one of only two countries getting a provisional exemption from heavy tariffs that are aimed at the rest of the world.

The prospect of tariffs, and the possibility they could cause a global trade war, have added to an already murky context for Canada that includes worries over NAFTA’s renegotiation and fears over competitiveness, following corporate tax cuts in the U.S.

“Recent developments with respect to steel and aluminum, despite the encouraging news... alongside heightened protectionist rhetoric, can potentially carry quite serious economic consequences,” Lane said in his address, which kicked off a new initiative by the bank to schedule speeches following rate decisions that are not accompanied by news conferences.

Lane elaborated on his comments about the steel and aluminum tariffs during a news conference that followed his address.

“It’s still a pretty fluid situation and I would say we’re not in a situation of calling all clear. I would say there’s still a significant degree of uncertainty around the future trade regime,” he said.

But Lane noted that the presence of considerable trade uncertainty didn’t prevent the bank from raising the rate in January.

His remarks came a day after the central bank maintained its interest rate at 1.25 per cent as it cited trade policy developments as important, growing sources of uncertainty for the global and Canadian economies.

He said the central bank is dealing with a situation where it doesn’t know when the NAFTA talks or other trade disputes will be concluded, nor does it know how governments or industries will react.

“The range of possibilities is quite wide and that means that trying to quantify any scenario in advance would not be useful for monetary policy purposes,” Lane said.

The speech also pointed to the positives for an economy that just delivered impressive growth in 2017 and, while it’s expected to moderate in 2018, it is still projected to continue expanding above its potential.

“While the future is subject to notable uncertainties ... trends over the past few quarters have been quite encouraging,” Lane said.

“The trends have been broadbased across regions and sectors.”

Lane also used the speech to applaud the bank’s gradual approach to raising rates, a process that has seen three hikes since last summer.