Bank of Canada warns of ‘consequences’ if Trump protectionist policies materialize
by Andy Blatchford, The Canadian Press
Central bank held its interest rate and said the Canadian economy is showing signs of improvement, but also baked some Trump risks into its outlook
OTTAWA—The Bank of Canada is warning there will be “material consequences” for trade if protectionist policies under U.S. president-elect Donald Trump come to fruition.
The central bank released its latest monetary policy report on Wednesday, offering its first updated forecasts and broad economic assessment since the November election victory by Trump, who will be sworn in Friday. It also held its benchmark interest rate at 0.5 per cent, as expected.
The quarterly document was released amid bleak warnings from experts about the potential fallout for Canada from Trump’s promised policies. Leaders around the world have been scrambling to gauge what shape Trump’s changes could take as well as when—and if—they will be implemented.
On one hand, the bank offered an optimistic outlook by largely sticking with its growth expectations from October, before the U.S. presidential election. The bank predicted Canada’s real gross domestic product to grow by 2.1 per cent this year—up from its two per cent forecast in October—and again by 2.1 per cent in 2018.
But when it comes to Trump, the bank cautioned that its outlook only factors in the possible effects of an expected U.S. fiscal boost. It said the anticipated fiscal expansion in the U.S., Canada’s largest trading partner, would help the economy through increased foreign demand.
The bank also incorporated Trump’s vow to cut corporate taxes—something it said would threaten Canadian competitiveness.
It said it did not account for the full range of Trump’s promised policy changes.
“While prospective protectionist trade measures in the United States would have material consequences for Canadian investment and exports, these measures have not been included in the base case,” said the bank, adding the outlook should be viewed as a “reasonable starting point” that will be updated as Trump’s plan takes shape.
“The outlook, however, is subject to considerable uncertainty, given the unknowns around policy actions by the incoming U.S. administration, particularly concerning trade.”
Under this cloud of uncertainty, federal officials have been trying to develop a good relationship with members of Trump’s inner circle and build a case to shield the Canadian economy from policy changes.
Prime Minister Justin Trudeau has said that senior government officials have had “constructive and positive discussions” with Trump’s team.
Until more information is available, the bank said it’s expecting economic activity in Canada to be propelled by the improving U.S. and global economies as well as Ottawa’s stimulative measures, which include billions of dollars in infrastructure investments and the distribution of child-benefit cheques.
The report predicted household consumption to be the main contributor to growth in 2017, with considerable help from government spending and a “moderate” expansion of total exports over the next couple of years. It also underlined the importance of the continued growth of Canada’s service sectors.
In explaining its decision to keep the interest rate at 0.5 per cent, the bank pointed to some of these factors as a reason to hold firm for its 12th consecutive announcement.
The bank’s rate decisions primarily hinge on its inflation expectations and it said low readings of late were largely due to weaker food prices, which are expected to dissipate.