Bank of Canada officials paused for the second consecutive time to assess the effects of the intensifying US Trade moves on Canada’s economy.
Tiff Macklem, Governor of the Central Bank said that the bank actively monitors inflation and growth in the face of the uncertainty created by United States trade policies.
Macklem, who spoke at a recent press conference and emphasized the unpredictable nature of US sanctions, said that “the trade war initiated by the United States is the largest headwind for the Canadian economy.”
Only hours before his decision, US president Donald Trump raised tariffs by 50% on Canadian imports of steel and aluminum, adding additional pressure to Canadian exporters, and fueling inflation fears.
Inflation balancing act
Central banks must find a balance difficult to achieve between rising costs and slowing economic growth.
The Bank of Canada has set a target of 1%-3% for core inflation. While the headline rate of inflation in Canada dropped from 2.7% to 1.7%, this was mainly due to lower energy prices.
Macklem said that this could be due to disruptions in the trade flow.
Macklem noted that the higher core inflation could be attributed in part to increased goods prices including food and reflect trade disruptions. Both firms and consumers seem to be preparing for further price increases.
Many businesses are attempting to shift higher costs of input caused by tariffs.
There is still room for rate cuts
Macklem, who is the BoC’s chief economist, warned that although the BoC kept rates at the same level for now the BoC may need to lower them further if there are signs of economic weakness as a result of prolonged trade tensions.
In order to support the economy the central bank already reduced its benchmark rate in the past nine months by 225 basis point.
Macklem, a reporter at the time, said that there was “clear consensus” to keep policy unchanged until we have more information. He did, however, highlight that the members were open to more stimuli if there was continued uncertainty.
The markets are divided on whether or not the BoC is going to cut its rates at their next meeting, which will be held on 30 July. Swap markets have priced in 55% of a possible hold.
On the other hand economists are leaning towards a quarter point cut. This is especially true if there continues to be job losses and non-tariff prices continue to fall.
The economic growth has lost momentum
Canada’s growth in the first quarter surprised to the upside. However, underlying trends remain weak. Macklem predicts that the growth of Canada’s second quarter will be “substantially lower” because business investment and spending domestically have been very low.
Before making any rate decisions, the bank will wait for two months’ worth of data on inflation and one month’s worth of GDP before making a decision. This will then be followed by another Monetary Report.
Macklem noted that while the BoC described two scenarios for growth in April — one with minimal impact of tariffs, and another assuming an all-out global trade war, and recession — the probability of the latter has been marginally reduced. The situation is still clouded by residual uncertainty.
The Canadian dollar is still strong despite headwinds
The Canadian dollar has risen despite the uncertainties. The Canadian dollar rose by 0.14 percent to 1,3698 US dollars, which is about 73 cents.
The economists expect two or three more rate reductions in 2025. They may even lower the benchmark rate by approximately 2% at year’s end.
The future of the trade relationship with the United States will determine the economic resilience in the country, as well as the inflation rate.
The Bank of Canada will remain cautious until then. It is expected that it will direct policy in accordance with incoming data, and avoid forward guidance, given the “highly uncertain” external climate described by Macklem.
As new information becomes available, this post Bank of Canada Holds Rate at 2.75% but Eyes July Cut amid Rising Trade Tensions could be updated.
