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Bank of Canada to keep an eye on Trump's trade policy

The Bank of Canada will keep a close eye on the potential harm to the Canadian economy from possible protectionist U.S. trade measures under the Trump administration, but is waiting for more details before incorporating those risks into its official forecasts for Canadian economic growth.

Central bank is starting to calculate effect of a Trump presidency on the Canadian economy

The Bank of Canada, led by Stephen Poloz, elected to keep its benchmark interest rate steady at 0.5 per cent on Wednesday. Poloz later told reporters 'a rate cut remains on the table.' (Adrian Wyld/Canadian Press)

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The Bank of Canada will keep a close eye on the potential harm to the Canadian economy from possible protectionist U.S. trade measures under the Trump administration, but is waiting for more details before incorporating those risks into its official forecasts for Canadian economic growth.

"If you're going to contemplate a shock that would significantly change the rule book or the framework in which Canadian companies operate, there's a presumption that it would be a negative effect on Canada," central bank governor Stephen Poloz told reporters at a news conference Wednesday.

"Until we know specifically what might be presented, we can't assess the magnitude" of any shock to the Canadian economy, Poloz said after the central bank announced its key interest rate would stand pat.

U.S. fiscal stimulus expected

In its Canadian economic growth forecasts, the central bank did, however, include one assumption about the Trump administration's policies: that Trump's expected stimulus to the U.S. economy "boosts demand for Canadian exports and supports business confidence in Canada."

"This positive effect is, however, tempered by a deterioration in Canadian competitiveness related to assumed corporate tax cuts in the United States," warned the bank's Monetary Policy report, which was released Wednesday morning.

The report projects Canadian GDP growth of 2.1 per cent in 2017, a slight upwards revision from its previous projection. The bank's previous projection of 2.1 per cent growth in 2018 was left unchanged.

"I totally understand the challenge" faced by the Bank of Canada in trying to predict the Trump administration's trade plans, said BMO senior economist Robert Kavcic.

"It really is going to come down to the details on any kind of trade measure," said Kavcic, who noted that protectionist moves by the U.S. might end up affecting just a few sectors of the Canadian economy, rather than bilateral trade as a whole.

Interest rates same, but a cut 'on the table'

The Bank of Canada's key interest rate remains at 0.5 per cent for the 12th time in a row. The bank last cut interest rates in July 2015, by 0.25 per cent.

The bank generally hikes rates when it is trying to pump the brakes on a hot economy and tame inflation, and cuts rates when it wants to stimulate the economy.

In his comments to reporters, Poloz said "a rate cut remains on the table" to respond to any potential risks to the Canadian economy.

The Canadian dollar lost just over a cent against the U.S. dollar in the hours following Poloz's comments.

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