BoC concerned about trade uncertainty
OTTAWA — The unknown consequences of ongoing trade tensions were “front and centre” in the Bank of Canada’s decision this week to leave its key interest rate unchanged, a top Bank of Canada official said Thursday.
In a speech one day after the rate announcement, senior deputy governor Carolyn Wilkins acknowledged it’s difficult for the central bank to estimate the “highly uncertain” economic fallout from tit-for-tat tariffs between Canada and the U.S., and the resulting blow to business confidence.
“The implications of the current trade environment were front and centre,” Wilkins told the Saskatchewan Trade & Export Partnership as she provided a sense of the deliberations behind the interest rate decision. “The trade environment... has been top of mind for some time given its importance to economic prospects here at home and abroad. And, while Canadian officials have been working hard to resolve the issues, a lot of uncertainty remains.”
The Bank of Canada held its trend-setting interest rate at 1.5 per cent Wednesday. It made a quarter-point increase at its July policy meeting and has hiked it a total of four times since mid-2017.
With Canada’s economy operating close to full tilt, many experts predict bank governor Stephen Poloz to raise the rate again at the Oct. 24 meeting.
Taking all the uncertainty into consideration, Poloz has followed what he’s described as a “gradual approach” to lifting the rate up from historically low levels.
On Thursday, however, Wilkins said the governing council debated whether the gradual approach continued to be appropriate, which suggests the bank considered either intensifying the pace of its interestrate increases or slowing it down.
In the end, she said the group agreed the current, go-slow approach remained the best way to proceed.
In her address, Wilkins noted how the Canadian economy has shown signs that it can adapt to higher rates. The economy has continued to perform well, with much of the growth fuelled by stronger exports, consumption and improving business investment, she said.
But unpredictable trade conditions have had consequences, Wilkins said.
The central bank estimates the tariffs already in place, combined with business uncertainty, will trim about two-thirds of a percentage point from Canada’s gross domestic product by 2020.
After just a couple of months, the tangible effects of the cross-border tariffs on steel, aluminum and consumer goods have already started showing up in the economic data, Wilkins said.