THE Bank of Canada warned after delivering another interest rate On Wednesday, Canada’s economy would be “tested” if the United States threatens a threat to impose general prices on Canadian products.
In a “serious” scenario mapped by the Central Bank, these prices could simultaneously send the Canadian economy to a recession later this year and push higher inflation.
On Wednesday, the Bank of Canada reduced its reference interest rate by 25 base points, bringing the policy rate to 3.0%.
This decision – the sixth consecutive central bank cup – was widely awaited by the markets and most economists.
BMO chief economist Doug Porter, said in a note to customers on Wednesday that the fall of a quarter of a point solidifies the position of the Bank of Canada as “the most aggressive knife in the world”.
Wednesday’s statements contained few directives at the front of the central bank on interest rates that could then go.
“There is a lot of uncertainty and it simply did not seem useful to provide advice,” the governor of Canada Banque Tiff Macklem said on Wednesday.
Trump’s pricing threats are looming on the policy rate
Wednesday, the focus of the Bank of Canada was largely running The threat of the United States prices and the impact of an imminent commercial dispute.
On Wednesday, US President Donald Trump argued that he is the imposing of the 25% of the general prices on the goods of Canada and Mexico on February 1.
“The potential of a trade conflict launched by new American rates on Canadian exports is a major uncertainty. This could be very disruptive for the Canadian economy and darken economic prospects “,” Macklem said on Wednesday.
The central bank warned in a press release accompanying the reduction in rates that “if general and important prices were imposed, the resilience of the Canada economy would be tested”.
James Orlando, director of the economy at TD Bank, told Global News that Canada was preparing for a “record year” on the economic level with largely under control and that reductions in interest rate previous has set up growth.
“(This) was supposed to be a year of economic renewal in Canada,” he said. “And now with Trump, all of this is uncertain.”
Macklem said that it is not clear exactly how Canada’s economy would react to prices, because decision -makers do not know how stemless the restrictions, which they would cover and how long they would be in place. The way Canada would react is also a joker in forecasts.
“Nevertheless, some things are clear,” said Macklem.
“A long -term and wide trade conflict seriously harmed economic activity in Canada. At the same time, the higher cost of imported goods will exert a direct increase in inflation. »»
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The Bank of Canada does not include prices in its reference forecasts for the economy. A revised perspective published on Wednesday provides for a growth of 1.8% of the real gross domestic product in 2025 and 2026.
But the central bank has carried out an analysis of a scenario, which Macklem called a “serious” case, in which the United States applies general prices of 25% on all business partners – not only Canada and Mexico – And these nations impose rates in kind in kind in kind. This situation would also see these prices remain in place on a “permanent” basis, and not quickly removed it as a negotiation tactic.
Under this analysis, Canada’s real GDP would be around 2.5 percentage points lower than it would be in the first year of prices that it would not be otherwise. This would put Canadian economic growth in the territory of the recession for this year – a forecast supported by other economists who weighed the impact of possible American rates.
Inflation could also jump higher, at least on a temporary basis, projects the Bank of Canada. Whether these cost increases are temporary or supported depends on the increase in inflation expectations, a phenomenon that has helped maintain the pressure of sticky prices in the recovery of the COVVI-19 pandemic.
A trade war could have an impact on prices in several ways, but the central bank quickly stresses that there is little historical precedent for the prices of this magnitude.
If Canada was to impose reprisal prices on American products in response to US commercial salvas, these items would immediately become more expensive for Canadian businesses.
Commercial uncertainty has also been a significant brake on the exchange rate between Canadian dollars and US dollars since Trump’s re -election, and a lower Huard makes imports more expensive.
Macklem said on Wednesday that this could increase inflation on fresh fruits and vegetables to a period of the year when most of the products that Canadians buy in grocery store are imported from abroad.
“It will happen fairly quickly,” said Macklem about higher costs on products.
A wider differential between interest rates on each side of the Canadian-American border can also harm the Huard.
On Wednesday, the American federal reserve reached its cycle of lower interest rates, as it also waited to assess the implications of inflation of Trump policies.
The Canadian dollar has somewhat weakened against the American greenback on Wednesday and remains more than 6% in range from one year to the next, holding more than 69 cents.
How can the Bank of Canada react to a trade war?
Macklem said that with inflation around the two% target of the central bank – it has cooled 1.8% in December – monetary policy “is better positioned to help the economy to S ‘ Adapt to new developments “.
But he also recognized that the only tool in the Bank of Canada to respond to the uncertainty of trade is the reference interest rate, which can be limited in the face of a weakening economy and the increase in inflation. Lower rates stimulate economic growth, while higher borrowing costs aim to tame inflation.
“We cannot rely against lower production and higher inflation at the same time,” said Macklem, adding that the board of directors should “carefully assess” inflation forecasts in the middle of an economy weakening.
Orlando said that in TD modeling, prices should raise inflation after being imposed but have the opposite effect when kidnapped. For the economy, however, commercial wars have a more prolonged negative effect, because consumer expenditure and the confidence of businesses take a hit.
This should push the Bank of Canada to rely more on the reduction of interest rates to strengthen the economy, rather than raising them or keeping them raised to deal with the risks of inflation, said Orlando.
“In the end, the shock of GDP probably prevails over the inflation shock, if it turned out to be temporary,” he said.
The Wednesday interest rate decision shows a central bank preparing for the worst but does not yet sound the alarm, say economists.
“Today’s stages of the Banque du Canada can be considered slats in listening before a possible trade storm,” said wearing in his note.
Porter does not agree that the inflationary impacts would be also pronounced as in the projections of the Bank of Canada, but he declared that the communications of the central bank show on Wednesday the monetary decision-makers proceed with caution in the event of a Canada- American.
Monetary markets see more than 43% of another drop by a quarter of a point to the decision of the following tariffs of the Bank of Canada on March 12, according to Reuters.
But if prices are imposed and prove to have power, the Bank of Canada “would be forced to reduce much more than the market currently,” said Porter.
Orlando said on Wednesday that, in the absence of a trade war, he maintains a 75 basic points of new interest rate drops this year to bring the Bank’s Policy rate to 2.25 %. He said that the Bank of Canada did not necessarily need to continue to reduce rates for each meeting in the future, and a break may well be in the cards in future decisions.
Macklem was invited Wednesday how he will prepare for Saturday when Trump’s February 1st feefare arrives.
“I’m going to watch the news very much,” he said.