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

Abbotsford food drive donates estimated $50k to food bank

Annual Fraser Valley Automall Food Drive donated $6,500 cheque, but up to $50,000 in total value

Abbotsford News Week In Review: Dec. 9-15

A new series on homelessness, students rally to keep classmate in Canada and lacking voting opportunities

Executive director of Kinghaven and Peardonville House to retire

Milt Walker steps aside after 35 years’ work with Abbotsford treatment centres

Abbotsford lags behind when it comes to voting opportunities

Most mid-sized B.C. cities provide more advance polls and mail-in ballots, analysis finds

Championship Saturday set for APD city tournament

Games running starting at 9 a.m. at Abbotsford’s Columbia Bible College

Trudeau to make it harder for future PM to reverse Senate reforms

Of the 105 current senators, 54 are now independents who have banded together in Independent Senators’ Group

Man dies after falling from B.C. bridge

Intoxicated man climbed railing, lost his balance and fell into the water below

Hundreds attend Hells Angels funeral in Maple Ridge

Body of Chad John Wilson found last month face-down under the Golden Ears Bridge.

B.C. animation team the ‘heart’ of new ‘Spider-Man: Into the Spider-Verse’

The animators, largely based in Vancouver, ultimately came up with a creative technique that is drawing praise

Light at the end of the tunnel for UN climate talks

Meeting in Katowice was meant to finalize how countries report their emissions of greenhouses gases

Gas prices to climb 11 cents overnight in Lower Mainland

Hike of 17 cents in less than 48 hours due to unexpected shutdown of Washington state pipeline

Supreme Court affirms privacy rights for Canadians who share a computer

Section 8 of the Charter of Rights and Freedoms protects Canadians against unreasonable search and seizure

Janet Jackson, Def Leppard, Nicks join Rock Hall of Fame

Radiohead, the Cure, Roxy Music and the Zombies will also be ushered in at the 34th induction ceremony

B.C. fire chief pleads with Ottawa for traumatic stress support

Campbell River fire chief Thomas Doherty presented concerns to federal government

Most Read