Bank of Canada summary details council's concerns over trade war in June rate decision
The central bank held its key benchmark rate at 2.75% on June 4, citing the need to monitor the impact of U.S. tariffs on Canada and on rest of the world and how businesses and consumers adapted to it.
Its summary of deliberations showed the members took into consideration the unexpected firmness in inflation data to take its rates decision and that the team spent considerable amount of time probing how trade policy was influencing prices.
Former BoC head Poloz says investors should consider hedging against global inflation risk
'Underlying inflationary pressures could persist for an extended period as consumers and businesses adapt to the rewiring of global trade,' the minutes said, even as the members acknowledged there could be downward pressure on prices too.
Businesses have been reporting that they would pass on higher costs stemming from trade disruptions, the members noted, adding that surveys showed that even consumers see prices rising.
Canada's annual inflation rate fell to 1.7% in April due to some tax removal, but closely tracked core measures of inflation rose above the bank's target range of 1% to 3% in the same month, stoking concerns that inflation was firming up.
The governing council excluding impact of taxes, inflation was 2.3%, which was slightly above expectations.
The fall in the rate of inflation to below 2% had helped the BoC to cut interest rates aggressively by 225 basis points since June last year, but the uncertainty and subsequent tariffs imposed by President Donald Trump has disrupted the bank's predictions.
'Members agreed that cost increases from trade disruptions may be playing a role in inflation in goods prices, but the direct impact from retaliatory tariffs was not yet evident,' the summary said.
The rate-setting team acknowledged that the pass-through of higher input costs to consumer prices would be difficult to track going forward.
The governing council will closely track how inflationary pressures are evolving and carefully assess the timing and strength of the downward pressure on inflation from a weaker economy and the upward pressure on inflation from higher costs, the members agreed.
The deliberations said if the recent firmness in underlying inflation were to persist, it would be more difficult to cut the policy rate. However, if the economy weakens and cost pressures are contained, there could be a need to cut rates in the future.
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I mean, the tariffs have not been as punitive for Canada as initially believed — nowhere close to it," said Mendes of Desjardins. Sector-specific pain However, real damage has been done in sectors like auto, steel, aluminum and lumber. The concern now is that the carve-outs Canada has secured for CUSMA-compliant products won't last. "Unless a trade deal is reached to significantly reduce U.S.-Canada tariffs by Aug. 1, when new U.S. tariffs are set to come into effect, we expect job losses and higher prices from tariffs to squeeze disposable income and cause households to tighten their purse strings," wrote Michael Davenport, senior economist at Oxford Economics in a note to clients. WATCH | Negotiations continue between Canada and the U.S.: Canada-U.S. Trade Minister Dominic LeBlanc, speaking to reporters in Washington, D.C., said Canada will only accept a deal when there is one in the best interest of workers and the Canadian economy on the table. On the one hand, some in the Trump administration will look at the U.S. economy's relative resilience as a reason to double down and push harder for more and more punitive tariffs. But escalation wouldn't just be bad for the Canadian economy. Right now, most businesses and consumers on both sides of the border have been sheltered from the worst impacts of the tariffs. That shelter depends on a fine and tricky balance of importers eating some costs, exporters dropping some prices and countries limiting retaliatory measures. Upending that balance further comes with risks on both sides of the dispute.
