Central bank anticipates economic disruption if trade tensions escalate
The Bank of Canada lowered its key interest rate by 50 basis points on Wednesday, bringing it down to 3.25% in a bid to stimulate the economy and control inflation. Governor Tiff Macklem also warned that tariff threats from US president-elect Donald Trump pose a “major new source of uncertainty” that could disrupt economic stability in the coming year.
“There’s no question that if these tariffs were to move forward at the level suggested, it would be highly disruptive to the Canadian economy. It would also be very disruptive for the US economy,” Macklem said during a press conference.
He added that any retaliatory measures by Canada could lead to higher imported inflation, complicating the Bank’s ability to manage prices.
“If there is a big change, we’re going to have to take that on board,” Macklem said. “Hopefully that doesn’t happen.”
The central bank has reduced its policy rate by a total of 1.75 percentage points since June, marking an aggressive approach to combat slowing growth. While Macklem signalled the potential for further cuts, he emphasized that BoC would likely proceed more cautiously.
“That’s a lot. That’s substantial,” Macklem said. “Those cuts will be working their way through the economy.”
“Going forward, I expect the governing council will be considering further reductions in the policy rate. But, as I said, with the policy rate now a lot lower, if the economy evolves broadly as we’re expecting, I anticipate we’ll be taking a more gradual approach.”
Read more: Bank of Canada rate cut: What are industry leaders saying?
The rate cut was prompted by mixed economic indicators. Inflation rose to 2% in October, up from 1.6% in September, but other metrics suggest ongoing weakness. Unemployment climbed to 6.8% in November, its highest level since January 2017 outside of the pandemic.
“The recent rise in the unemployment rate alongside weaker-than-expected gross domestic product was enough to convince the Bank of Canada that another supersized rate cut was warranted. We think this misses the forest for the trees,” TD economist James Orlando wrote in a note to clients.
“Hiring has re-accelerated over the last few months, while underlying growth momentum has been robust with consumer spending driving fundamental demand. Not to mention, the real estate market has caught fire once again.”
Meanwhile, per-person gross domestic product (GDP) declined for a sixth consecutive quarter, and economic growth is expected to fall short of the Bank’s fourth-quarter forecasts.
Deputy Governor Rhys Mendes warned that allowing inflation to fall too far below the 2% target could damage the economy.
“When prices are increasing by significantly less than two per cent, it’s usually because the economy and the job market are in bad shape. Many Canadians would not feel better off,” Mendes said in a recent speech. “Inflation expectations could also start to shift down, making it harder to get inflation back up to 2%.”
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