OTTAWA—Introducing auto tariffs into the Canada-U.S. trading system would put the Bank of Canada “between a rock and a hard place” when it comes to adjusting interest rates, bank governor Stephen Poloz told a business audience in Moncton, N.B., Thursday.
“(It’s) the worst place for a central bank to be,” Poloz said when asked his thoughts about how the outcome of the negotiations for a new North American Free Trade Agreement could affect monetary policy.
The bank governor said uncertainty over NAFTA has resulted in less business investment in Canada than there otherwise should be.
“So you get NAFTA signed, then investment should pick up,” he said.
But if the trade deal that currently includes Canada, Mexico and the United States were to disappear, the next question becomes what will replace it, Poloz said. He said losing NAFTA could lead to new, harmful tariffs, likely compounded by countermeasures.
Poloz said while tariffs imposed in June on Canadian steel and aluminum imports into the United States—and counter tariffs imposed on U.S. goods coming into Canada—have already been built into the central bank’s economic forecasts, the bank can only speculate about what could come next.
“Tariffs on cars is another thing,” he said, warning that such punitive measures could both spike inflation and slow the economy at the same time.
One of the bank’s tools for smoothing an economic downturn is to lower interest rates. But if inflation balloons as a result of higher prices for automobiles and other big ticket items, the bank would have to consider moving in the opposite direction, Poloz said.
“All of those ingredients make it very complicated for a central bank,” he said, suggesting that dealing with the outcomes would be more complicated than the aftermath of the oil price shock of 2014.
Earlier Thursday, in a speech to the Atlantic Provinces Economics Council and Greater Moncton Chamber of Commerce, Poloz said disruptive technologies are making it harder to determine whether, and how quickly, to raise interest rates.
But Poloz said Canadians need not fear the new digital age and, in fact, he added they are already benefiting from it, and embracing it.
“The technology is enabling growth everywhere, including in industries that have not traditionally been considered high tech,” Poloz said.
While technology has made some jobs obsolete, digital disruption, overall, is producing a positive impact on the economy, he added.
The bank governor pointed to the computer system design sector as a prime example, noting it has grown by seven per cent annually over the past five years and now accounts for nearly two per cent of Canada’s economic output.
“To put this into context, the computer system design sector is already more important to the economy than the auto and aerospace sectors combined,” Poloz said.
Canada also now has the world’s third-largest concentration of researchers in the field of artificial intelligence, he said, with foreign direct investment coming into the country increasingly skewed toward high tech.
Digital disruption is a factor in deciding monetary policy, along with inflation and the ongoing concerns around global trade uncertainty, Poloz added.
But new digital technologies, in particular, could be giving the economy more room to grow before inflation pressures emerge, he said.
“Raising interest rates too quickly could choke off this economic growth unnecessarily,” the governor said, adding it makes monetary policy even more data-dependent.
At the same time, uncertainty is no excuse for inaction in deciding whether to raise interest rates, Poloz said.
“What it does mean is that we will move rates toward a more neutral level gradually, continuously updating our judgement on these key issues in real time,” he said.
The Bank of Canada held its trend-setting interest rate at 1.5 per cent earlier this month but is widely expected to raise the rate at its next scheduled announcement on Oct. 24.News from © Canadian Press Enterprises Inc. 2016