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

Drag racing open house attracts 200-plus in Campbell River

Proponents still need to provide more information to the City

Interested in opening a cannabis store? City to process applications through provincial referral

People interested in opening a retail cannabis outlet should get their paperwork… Continue reading

Campbell River’s advisory committee restructuring questioned

A group made up of 10 local non-profit agencies had serious concerns… Continue reading

Cortes Island to identify potential industrial land

Process will look long-term at updating OCP for the island

VIDEO: Campbell River residents go underground at John Hart generating station

About 1,250 people expected at sold-out tour on Sunday

VIDEO: Deer struggles with life-preserver caught in antlers

Campbell River resident captures entangled deer on camera

Scheer pushes Trudeau to re-start Energy East pipeline talks

Conservative Leader Andrew Scheer questioned the Prime Minister over Trans Mountain project

Mistaken identity: Missing dog claimed in Moose Jaw belongs to another family

Brennen Duncan was reunited with a white Kuvasz that was found in Saskatchewan

Abandoned kitten safe and sound thanks to B.C. homeless man

‘Jay’ found little black-and-white kitten in a carrier next to a dumpster by a Chilliwack pet store

Police chief defends controversial marijuana seizure

Advocates said cannabis was part of an opioid-substitution program in Vancouver’s Downtown Eastside

Trans Mountain completes Burrard Inlet spill exercise

Training required, some work continues on pipeline expansion

Supporters of B.C. man accused of murdering Belgian tourist pack courtoom

Family and friends of Sean McKenzie, 27, filled the gallery for brief court appearance in Chilliwack

Pot, cash, mansions: Judge divvies up illegal estate of divorcing B.C. couple

The Smiths ran a multi-million marijuana operation that spanned three counties

‘Little Feet’ book documents B.C. woman’s horrific 2001 accident

Heather Williams has documented the two profound stages beforeand after the accident

Most Read