POLOZ SAYS RATE CUT ON TABLE IF TRUMP MEASURES HIT CANADIAN ECONOMY

‘Yes, a rate cut remains on the table and it would remain on the table as long as those downside risks were still present’ —STEPHEN POLOZ, BANK OF CANADA GOVERNOR, AFTER HOLDING RATES AT 0.5 PER CENT ON WEDNESDAY

Bank of Canada Governor Stephen Poloz said Wednesday he’s prepared to cut interest rates if new U.S. protectionist measures derail the Canadian economy.

The bank on Wednesday held its trendsetting overnight interest rate at 0.5 per cent, as expected, citing U.S. and global economic uncertainties and continued slack in the Canadian economy.

But in response to a question on whether the Governing Council discussed the possibility of a cut during their interest-rate deliberations this week, Poloz said the bank would cut interest rates if U.S. president-elect Donald Trump’s policies put the bank’s inflation target at risk. “Should any of those downside risks materialize and put our inflation target at risk then we would have the room to manoeuvre,” Poloz said. “Yes, a rate cut remains on the table and it would remain on the table as long as those downside risks were still present.”

The Canadian dollar plunged almost a full cent following the Bank of Canada governor’s comments about possibly cutting interest rates. The loonie was down 0.98 of a U.S. cent to US75.60 cents just before 1 p.m. ET. The loonie closed at US75.42 cents, down 1.16 of a U.S. cent.

The bank also released its Monetary Policy Report that sets out its latest forecasts for Canadian economic growth. The bank predicts Canada’s economy will grow 2.1 per cent in each of 2017 and 2018. The Canadian economy, which has struggled following the downturn in oil and commodity prices, should return to full capacity around mid-2018, the bank said.

The bank’s forecast also considers the impact that Trump’s new administration will have on Canada’s economic prospects. Trump won the U.S. presidential election on promises to cancel or renegotiate the North American free-trade agreement, cut taxes, and boost infrastructure spending.

“In our discussions, Governing Council was particularly concerned about the ramifications of U.S. trade policy, because it is so fundamental to the Canadian economy,” Poloz told reporters.

Poloz said it is tough to pin a value on policies it has yet to see, but the bank decided it would be reasonable to assume Trump’s actions will add half a percentage point to U.S. GDP by the end of 2018. Ordinarily, what’s good for the U.S. economy is good for Canada. But Poloz cautioned that Trump’s policies will only have a muted impact on Canada, adding just 0.1 of a percentage point to Canadian GDP by 2018.

Trump’s promise to boost infrastructure spending could kick start demand for Canadian-made equipment and services, Poloz said. But three factors could reduce that, he added. Trump’s promise to lower taxes could make the U.S. a more competitive destination for foreign investors. Bond yields have risen since Trump’s election, and this could hike mortgage rates and slow Canadian housing markets. Finally, the loonie has held its own against the U.S. greenback, creating headwinds for Canadian exports.

Not every observer thinks the bank should build a Trump factor into its forecast.

“I think the Bank of Canada is absolutely right to flag the uncertainty in the economic outlook and adopt a wait-and-see approach, but building in Trump fiscal stimulus to the forecast is a mug’s game since we have no idea what will actually materialize or the timing,” said Craig Alexander, chief economist with the Conference Board of Canada.

The bank also cautions in its Monetary Policy Report that its forecasts for Canadian, U.S. and global economic growth are subject to uncertainty over what Trump might do as president, particularly on trade.

The concerns over uncertainty caught the attention of economists. “Overall, we judge the commentary is neutral, though the bank highlights that uncertainty remains elevated, which could change the outlook in a hurry,” said Benjamin Reitzes, senior economist with BMO Capital Markets.

“Caution is once again the key to the Bank of Canada’s thinking. Heightened uncertainty and the remaining economic slack both point to a bank that is likely to maintain its policy rate at 0.5 per cent for some time to come,” said Brian DePratto, senior economist with TD Economics.

WE HAVE NO IDEA WHAT WILL ACTUALLY MATERIALIZE.