Trade dispute, housing to ‘figure prominently’ in central bank’s rate decision

OTTAWA — The impacts of both the escalating cross-border trade fight and new mortgage rules will “figure prominently” for the Bank of Canada ahead of its upcoming interest-rate decision, governor Stephen Poloz said Wednesday.

The central bank, Poloz said, has been incorporating into its projections the fallout of U.S. steel and aluminum tariffs as well as retaliatory measures by Canada and others.

In the lead-up to his July 11 rate announcement, the bank has also kept its focus on incoming, individual-level data that shows the effects of Canada’s new lending rules on the housing market and mortgage renewals.

“We expect these issues to figure prominently in our upcoming deliberations,” Poloz told the Greater Victoria Chamber of Commerce.

The Trump administration announced it would slap punitive tariffs on Canada and other allies on May 31 — a day after Poloz made his last interest-rate announcement.

Before U.S. President Donald Trump imposed the tariffs, experts had widely predicted Poloz to raise his trend-setting rate at the upcoming July 11 policy meeting.

Since then, however, there have been growing doubts Poloz will hike at next month’s meeting.

“It seems that Poloz, like the market, may be for now on the fence for a July hike,” CIBC chief economist Avery Shenfeld wrote Wednesday in a research note.

“We’ll stick to our call that rates will indeed rise in July, but it’s a close one.”

The Trudeau government has responded to the U.S. tariffs by threatening to impose levies of its own on many U.S. products in a reprisal that’s set to take effect Sunday. The dispute is expected to hurt both economies.

The deterioration of U.S. trading relationships with Canada and other key economies around the world has also raised concerns of a global trade war.

Trump has also threatened to apply tariffs on automotive imports, which many warn would have far greater consequences for the Canadian economy than the U.S. levies on steel and aluminum.

Other factors have also complicated Canada’s interest-rate outlook since Poloz’s last announcement on May 30. They’ve included unexpectedly weak inflation and retail sales numbers, and expectations that Friday’s reading for real gross domestic product for April will show a decline.

In addition to the economic data, the bank’s policymakers must consider the long list of unknowns faced by the Canadian economy, such as the difficult renegotiation of the North American Free Trade Agreement.

In Wednesday’s speech, Poloz listed some of those uncertainties: how much trade policy is holding back business investment, how new mortgage rules are affecting the housing market and how sensitive households are to higher interest rates considering all the debt they’ve been amassing.

“There is always a degree of uncertainty when using economic models, but these days there is a litany of things we simply do not know,” Poloz said.

“With all these uncertainties, setting monetary policy is a matter of risk management… This is why we say that the bank is particularly data-dependent right now.”

Poloz has introduced three rate hikes since last July following an impressive economic run for Canada that began in late 2016.

But he’s kept the benchmark rate at 1.25 per cent since January as the bank continues its careful process of determining the best timing for its next hike.

His address Wednesday was focused on the Bank of Canada’s ongoing efforts to provide more transparency and clarity on its monetary policy decisions and to make economic issues more accessible to a broader section of the general public.

“The challenge for us is to make sure that when we have a message to deliver, you will not need a degree in economics to understand it,” he said.

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