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

Kootenay region posts 10-per-cent return rate on electoral reform ballots

As of Nov. 13, only 5.3 per cent of ballots had been returned province-wide

Talking transgender issues with Nelson advocate

Nov. 20 is the Transgender Day of Remembrance

Leafs Roundup: Nelson adds a win and a tie on two-game road trip

Nelson native Reid Vulcano scored in his KIJHL debut

Over 120 people to lend a hand at Community Connect

The annual event offers free services at Central School

Nelson honours veterans 100 years after end of WWI

Several hundred people gathered at the cenotaph on Sunday

VIDEO: Amazon to split second HQ between New York, Virginia

Official decision expected later Tuesday to end competition between North American cities to win bid and its promise of 50,000 jobs

Disabled boy has ‘forgiven’ bullies who walked on him in stream, mom says

A Cape Breton teen who has cerebral palsy was told to lie in a stream as other kids walked over him

Letters shed light on state of mind of B.C. mom accused of daughter’s murder

Trial of South Surrey mother Lisa Batstone begins in BC Supreme Court

Vancouver man must pay $22,000 after breaking strata rules

Peter Gordon took his fight over his rented condo to the civil resolution tribunal, but lost

B.C. cheese linked to 5 E. coli cases

People are asked to throw out or return ‘Qualicum Spice’ cheese

Canada Post no longer guarantees delivery times amid more rotating strikes

The Canadian Union of Postal Workers closed two major processing centres in Ontario and B.C.

B.C. city councillor resigns as AutismBC director amid SOGI controversy

AutismBC president Gary Robins says Laurie Guerra’s resignation is effective Nov. 12

McGill students vote overwhelmingly to change Redmen team nickname

Student union held a referendum after a campaign by Indigenous students

B.C. university pride group replaces white supremacy posters

Around 50 people walked through downtown Victoria to share posters of love

Most Read