Bank of Canada holds interest rate at 2.25%, with CUSMA review an 'important risk'
CBC
The Bank of Canada has held its key interest rate at 2.25 per cent for a second consecutive meeting, though its trajectory could change as the country stares down a risky free trade negotiation with the U.S. and Mexico.
The central bank's economic outlook has not evolved "significantly" since its projection in October, governor Tiff Macklem told media during a news conference in Ottawa on Wednesday.
"However, uncertainty around our forecast is heightened, and the range of possible outcomes is wider than usual," he said during his prepared remarks. "U.S. trade policy remains unpredictable, and geopolitical risks are elevated."
The upcoming review of the Canada-U.S.-Mexico Agreement on trade, or CUSMA, is a key source of economic uncertainty and an "important risk" to Canada's economic outlook, noted Macklem.
"It's pretty clear that the days of open, rules-based trade with the United States are over," he said. "We need to get on and adjust to that."
He also cautioned that Canada's efforts to diversify trade won't completely offset "structural" damage inflicted on the economy during the U.S. trade war.
Asked by the Wall Street Journal whether the outcome of the CUSMA negotiation will dictate future interest rate decisions, Macklem said "it is an important risk to our projection."
The central bank's current economic projections are based on a scenario in which U.S. tariffs against Canada remain in place and CUSMA-related exemptions maintain some free trade with the U.S. "That could change with the review," he said.
Ongoing threats to the independence of the U.S. Federal Reserve are also contributing to "heightened" economic uncertainty, said Macklem, in Canada and elsewhere.
The governor recently signed a letter in support of U.S. Fed chair Jerome Powell, who is under investigation by the country's Department of Justice after defying pressure by U.S. President Donald Trump to cut interest rates.
The U.S. Fed is the "biggest, most important central bank in the world, and we all need it to work well. A loss of independence for the Fed would affect us all," Canada especially, Macklem said.
Joseph Brusuelas, chief economist at RSM, wrote in a note to clients that he doesn't expect rates to change further this year. But the upcoming CUSMA review could "prove contentious."
To that point, "any policy shift on the central bank’s part would likely be in favour of cutting rates should growth slow, labour slack increase or if there is a more pronounced break in economic relations with the U.S.," he wrote.
With Canadian population growth slowing and the economy adjusting to U.S. protectionism, the central bank expects modest GDP gains and that the inflation rate will stay close to its two per cent target.
