Central bank hikes rate, says tariffs already in place to have modest impact

Bank of Canada has its eye on how widening global trade disputes will impact economy

The Bank of Canada raised its benchmark interest rate Wednesday in an economy that it predicts will remain resilient even as it faces an even bigger bite from deepening trade tensions.

The rate hike was the central bank’s first interest rate move in six months and lifted the trend-setting rate to 1.5 per cent, up from 1.25 per cent. It was the bank’s fourth rate increase over the last 12 months.

The decision, a move that will likely prompt Canada’s big banks to raise their prime rates, arrived in the middle of a trade dispute between Canada and the United States that’s expected to hurt both economies.

The bank took the step even as it predicts larger impacts from the widening trade uncertainty, particularly after the United States imposed steel and aluminum tariffs on Canada and Ottawa’s retaliatory measures. The tariff fight, the bank estimated, will shave nearly 0.7 per cent from Canada’s economic growth by the end of 2020.

However, the bank expects the negative blow of the trade policies recently put in place to be largely offset by the positives for Canada from higher oil prices and the stronger U.S. economy.

“Although there will be difficult adjustments for some industries and their workers, the effect of these measures on Canadian growth and inflation is expected to be modest,” the bank said in a statement.

But in addition to steel and aluminum tariffs, Canada is facing a significant trade-related unknown that many believe would inflict far more damage on the economy: U.S. duties on the automotive sector

U.S. tariffs on the auto sector’s integrated cross-border supply chains would have “large impacts on investment and employment,” the Bank of Canada warned Wednesday in its accompanying monetary policy report.

The bank, however, didn’t quantify the possible effects of auto tariffs on Wednesday. Governor Stephen Poloz has signalled in the past that he’s focused on data he can measure rather than the impacts of trade policies that have yet to materialize.

Canadian businesses must also contend with the uncertainty surrounding the difficult renegotiation of the North American Free Trade Agreement, for which talks have stalled.

The Bank of Canada also has its eye on how widening global trade disputes, including an intensifying battle between the U.S. and China, will affect the world’s economy. It warns that “escalating trade tensions pose considerable risks to the outlook” at the global level.

Even with the trade issues, the Bank of Canada is now predicting slightly stronger growth for Canada over the next couple of years, according to updated projections it released Wednesday in its quarterly monetary policy report.

It expects real gross domestic product to grow 2.2 per cent in 2019, up from its April call of 2.1 per cent, and by 1.9 per cent in 2020, compared with its previous prediction of 1.8 per cent. The economy’s growth projection for this year remains at two per cent, the bank said.

Looking ahead, the bank predicts Canadian growth will continue to see bigger contributions from exports and business investment, which were both stronger than expected in the first three months of the year.

At the same time, household spending will represent a smaller and smaller share of overall growth due to the dampening effects of higher interest rates and stricter mortgage rules, it said.

Leading up to the announcement Wednesday, Poloz was widely expected to raise the interest rate following a run of healthy economic numbers, including the Bank of Canada’s own survey on business sentiment, tightened job markets and growth in wages.

Moving forward, the bank said it expects higher interest rates will be necessary over time to keep inflation near its target, however, it intends to continue along a gradual, data-dependent approach.

The country’s inflation rate is expected to rise to 2.5 per cent — above the two per cent mid-point of the bank’s target range — due to temporary factors such as higher gasoline prices before settling back down to two per cent in the second half of 2019.

Andy Blatchford, The Canadian Press

Like us on Facebook and follow us on Twitter.

Just Posted

Man pulls out gun at Keremeos gas station

RCMP arrested an Olalla man around 10 a.m. Sunday after he pulled a gun earlier that morning.

UPDATE: Sagmoen to stand trial

Curtis Wayne Sagmoen will appear on all three Vernon matters this week

Oliver arena celebrates anniversary with Montreal Canadiens alumni game

Players have the chance to play with or against the Montreal Canadiens alumni

UPDATE: Hedley residents will be without water for at least one week

Elevated levels of coliform and arsenic leave small town dry

Godsmack and Volbeat coming to Penticton

Tour includes a stop at the South Okanagan Events Centre

More snow to kick off the week

The Okanagan and Shuswap will see a light dusting of snow Monday night

Federal government plans examination of coerced sterilization

The Liberals have been pressed for a rapid response to recent reports on the sterilizations

Huitema, Cornelius named 2018 Canadian Youth International Players of the Year

Huitema was captain of Canada’s fourth-place team at this year’s FIFA U-17 Women’s World Cup

Canada not slowing emissions from oil and gas: environmental groups

New report released at the United Nations climate talks in Poland

Liberal Party moves Trudeau fundraiser from military base

The fundraiser is scheduled for Dec. 19, with tickets costing up to $400

Pipeline protesters arrested at B.C. university

Three protesters were arrested after TRU property allegedly vandalized with red paint

Goodale to ‘examine’ transfer of Rafferty to medium-security prison

Michael Rafferty was sentenced to life in prison in 2012 in the kidnapping, sexual assault and first-degree murder of Tori Stafford

‘Abhorrent’ condition of autistic B.C. boy shows flaws in care system: report

‘Charlie’ was underweight and ‘covered in feces’ when he was removed from his mom’s care

Minister appoints former CIRB chair to resolve Canada Post labour dispute

Postal workers engaged in weeks of rotating walkouts

Most Read