Central bank warns of fallout from trade fights, signals patience on rates

OTTAWA — Even with reassuring trade news out of the United States, a senior Bank of Canada official warned Thursday of serious consequences related to steel and aluminum tariffs as he sent signals the bank’s in no rush to raise interest rates.

Deputy governor Timothy Lane said in a speech that the central bank is closely watching the uncertainty surrounding global trade tensions, competitiveness issues and the future of the North American Free Trade Agreement.

But even as he underlined the many significant economic unknowns, Lane also delivered an upbeat message about the health of the Canadian economy and its positive outlook, in general.

Lane’s appearance at the Greater Vancouver Board of Trade came shortly after Canada learned it was getting relief from U.S. penalties on steel and aluminum for an undetermined period. Canada is one of only two countries getting a provisional exemption from heavy tariffs that are aimed at the rest of the world.

The prospect of tariffs, and the possibility they could cause a global trade war, have added to an already murky context for Canada that includes worries over NAFTA’s renegotiation and fears over competitiveness, following corporate tax cuts in the U.S.

“Recent developments with respect to steel and aluminum, despite the encouraging news … alongside heightened protectionist rhetoric, can potentially carry quite serious economic consequences,” Lane said in his address, which kicked off a new initiative by the bank to schedule speeches following rate decisions that are not accompanied by news conferences.

Lane elaborated on his comments about the steel and aluminum tariffs during a news conference that followed his address.

“It’s still a pretty fluid situation and I would say we’re not in a situation of calling all clear. I would say there’s still a significant degree of uncertainty around the future trade regime,” he said.

But Lane noted that the presence of considerable trade uncertainty didn’t prevent the bank from raising the rate in January.

His remarks came a day after the central bank maintained its interest rate at 1.25 per cent as it cited trade policy developments as important, growing sources of uncertainty for the global and Canadian economies.

He said the central bank is dealing with a situation where it doesn’t know when the NAFTA talks or other trade disputes will be concluded, nor does it know how governments or industries will react.

“The range of possibilities is quite wide and that means that trying to quantify any scenario in advance would not be useful for monetary policy purposes,” Lane said.

The speech also pointed to the positives for an economy that just delivered impressive growth in 2017 and, while it’s expected to moderate in 2018, it is still projected to continue expanding above its potential.

“While the future is subject to notable uncertainties … trends over the past few quarters have been quite encouraging,” Lane said.

“The trends have been broad-based across regions and sectors.”

Lane also used the speech to applaud the bank’s gradual approach to raising rates, a process that has seen three hikes since last summer.

The go-slow strategy, he said, has enabled the bank to carefully analyze data and avoid undermining growth by moving too quickly.

TD senior economist Brian DePratto wrote in a note Thursday that while Lane’s speech offered a lot more nuance beyond the bank’s statement Wednesday, ”the key message seemed to be the same: a ‘wait and see’ approach remains the best option given the plethora of factors obscuring the underlying economic picture at present.”

That said, DePratto added the Bank of Canada isn’t going to stay on hold until it has clarity on all elements. ”We continue to expect another hike around mid-year,” he said.

Following Wednesday’s policy decision, experts pointed to several other arguments the bank raised to support its patient approach on interest rates. Among the examples, the bank pointed to weaker-than-expected growth in the fourth quarter and the need for more time to assess the economic impacts of new housing-market policies, including recent changes to mortgage rules.

Many experts now predict Bank of Canada Governor Stephen Poloz will wait until the second half of the year before raising the rate again, while some say the next hike might not come until 2019.

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