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

OUR VIEW: Memories of the ‘strip’ still fresh

Can’t blame Surrey residents for being wary after the human tragedy of 135A Street

HOCKEY: Olympic dreams for Surrey teen now with Canada’s U18 team

Cloverdale’s Jenn Gardiner a third-year star with Comets of B.C. Female Major Midget League

‘Quite a coup’ in rail-safety funding: South Surrey-White Rock MP

Relocation study not included in money for infrastructure improvements along waterfront train route

Fatal crash on Highway 17 in Delta

Footage from the scene shows a mangled white truck that appears to have slammed into a barrier

Risk of thunderstorm this afternoon for Vancouver Island and Lower Mainland

A special weather statement calls for heavy rain and wind over the next 48 hours

VIDEO: Neighbours fear impact of B.C. tent city residents

Greater Victoria residents opposed to campers voice concerns at provincial campground

New evacuations ordered because of Florence flooding

Emergency managers on Friday ordered about 500 people to flee homes along the Lynches River

B.C. doctor weighs in on the kid ‘screen time’ debate

A Maple Ridge mother opens up about her children’s use of tablets, smartphones and television

Volunteer-based safety team gets city funding to continue work in Vancouver

Good Night Out is a non-profit society that works to keep people safe at night on Granville Strip

B.C. councillor’s expenses being sent to the RCMP

Decision to have expenses audited and shared with RCMP taken at special meeting of council

More than 35 B.C. mayors elected without contest

No other candidates for mayor in the upcoming local election in 22 per cent of B.C. cities

5 to start your day

National forecaster issues rainfall warning, three crashes in Metro Vancouver overnight and more

Burnaby RCMP investigating ‘serious’ rollover crash

Shortly after 1 a.m. Friday, police said a truck crashed closing Lougheed Highway

Most Read