Poloz in Victoria: No one wins a trade war
Central bank governor says trade dispute with U.S., housing to ’figure prominently’ in upcoming rate decision
The impacts of a Canada-U.S. trade war will be scrutinized in the runup to the Bank of Canada’s next interest rate determination, Governor Stephen Poloz told a Greater Victoria Chamber of Commerce audience Wednesday.
The bank will make its next rate decision on July 11. It’s the first since the U.S. announced punitive tariffs on Canada and other allies, and Poloz is being closely watched for a response. Canada is responding to the U.S. penalties with dollar-for-dollar reprisals on other goods that take effect this Sunday.
“We are working to incorporate in our projections the effects of the recently announced U.S. steel and aluminum tariffs, along with retaliatory measures, both in Canada and globally,” he said.
He also cited the effect of tightened mortgage requirements on the housing market.
“We expect these issues to figure prominently in our upcoming deliberations.”
At a later news conference, he said he agrees with the common assessment that no one wins a trade war. “Put it the other way around —everybody wins when there is more trade.”
He said reducing trade by way of barriers, like the 25 per cent U.S. duty on Canadian steel, prompts retaliation. While that “sounds like you’ve made it a level playing field,” it’s a very complicated to determine who pays the extra cost.
The important thing missing in such analysis is the consumer, he said.
“Somebody is paying for the 25 per cent … that price gets passed through. What happens is, the consumer has less spending power than before. That’s how everybody loses a trade war.”
Businesses might be on a level playing field, but consumers on both sides of border will be paying more, and buying less.
“It’s the part of the analysis which I think is being left behind. The consumer is the ultimate arbiter of whether the economy slows or not in response to a trade action.”
Asked about U.S. President Donald Trump’s complaints and threats about Canadian trade, he said the bank will just concentrate on policies that are in effect.
“Things that are just at the level of rhetoric, we don’t respond to them at all.”
Trade actions like the ones underway “go to the very fabric of how the economy functions,” he said.
The expansion of international trade has been tremendously beneficial and dismantling that would be “tremendously unbeneficial.”
Poloz said the number of unknowns in economics is increasing. “There’s always a degree of uncertainty when using economic models, but these days there is a litany of things we do not know.”
He said they include uncertainty about how trade policy is holding back investment, and how the new guidelines for mortgages are affecting the housing market.
Generally, he said, inflation is on target and the economy is running at close to its full potential.
“Usually, that’s the only two check marks you need. The thing that looks odd in that picture is that interest rates are still low by historical standards.”
Rates could drift higher, but it will be a gradual process.
“We’re data dependent, not headline dependent.”
Elsewhere, Poloz focused on the bank’s drive to be more transparent and plain-spoken in its communications. But the regular guessing games about what it’s doing to the rate will remain. The bank has been limiting its “forward guidance” because Poloz said it would put its credibility at risk, given the number of uncertainties.