NAFTA uncertainty key factor in Bank of Canada's interest rate standstill
Bank of Canada Senior Deputy Governor Carolyn Wilkins responds to a question during a news conference in Ottawa, Wednesday January 17, 2018. (THE CANADIAN PRESS / Adrian Wyld)
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 implications 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 said in prepared remarks of her speech in Regina, 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."
Wilkins noted how the Canadian economy has continued to perform well -- with growth fuelled by stronger exports, consumption and improving business investment.
But unpredictable trade conditions have had consequences, she added.
She said the central bank estimates the tariffs already in place and 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 in her address to the Saskatchewan Trade & Export Partnership.
Due to the uncertain trade environment, she said the central bank's estimates may need be adjusted as more information rolls in about the fate of NAFTA's renegotiation and how businesses are responding with their plans.
She said businesses point to trade uncertainty as a key factor stopping them from pouring more money into their operations to keep up with growing demand -- and some say they're exploring whether to invest in the U.S. instead of Canada.
The Bank of Canada held its trend-setting interest rate at 1.5 per cent Wednesday and said it would continue with its gradual, rate-hiking approach that's seen four increases since mid-2017.
With Canada's economy operating close to full tilt, many experts predict governor Stephen Poloz will hike the rate again at the Oct. 24 meeting.
The federal government has been renegotiating NAFTA with the U.S. and Mexico for the last 13 months. U.S. President Donald Trump has repeatedly threatened to impose punishing auto tariffs on Canada -- which would be devastating for both economies -- if a deal cannot be reached.
"The big picture over the summer has been that the global economy is doing well, despite some troubling developments on the trade front," Wilkins said.
"The Canadian economy is on solid footing, although we are feeling some headwinds from the trade environment."