Bank of Canada governor Tiff Macklem says a trade conflict with the U.S. could do more damage to the economy than the pandemic.
In a speech Feb. 21 before the Mississauga Board of Trade and the Oakville Chamber of Commerce, Macklem addressed trade tensions with America for the first time since the central bank’s latest interest rate decision on Jan. 29, which came before U.S. President Donald Trump signed an executive order imposing tariffs on imports from Canada, Mexico and China.
“Increased trade friction with the United States is a new reality,” he warned Friday, adding that “Unlike the pandemic, if tariffs persist there will be no economic bounceback,” noting that tariff uncertainty is already hurting the economy.
“What’s different about COVID is that, as the economy reopened, there was this huge bounceback, the most rapid recovery ever,” Macklem told a news conference following the speech.
In a trade war, the economy works less efficiently as business investment, production and incomes decline, he went on to say. Nevertheless, he seemed supportive of Canada imposing retaliatory tariffs.
“You want to get to a better place,” he said. “You want to get back to a place where you can have more open, more predictable trade, and that’s why you respond.”
While Canada obtained a tariff reprieve until March, the prospect of a trade war puts the Bank of Canada in a bind, economists say, as it must weigh the risks and expectations of a slowing economy versus persistent inflation.
“Central banks can do little to mitigate the damage caused by a trade war,” said Macklem. “Our role will be to balance the upside risks to inflation from higher costs with the downside risks from weaker demand.”
Many experts believe central bankers will choose to be more aggressive with rate cuts if a tariff war breaks out, despite concerns around creeping inflation.
“We think the Bank of Canada is ultimately going to want to provide support to the Canadian economy,” said Randall Bartlett, deputy chief economist at Desjardins, adding that he expects the bank to reduce the policy rate to 1.5 per cent by the beginning of 2026 if Trump’s 25 per cent tariffs are, in fact, implemented.
If the tariffs end up being lower — around 10 per cent for most imports from Canada — Bartlett thinks the interest rate would fall to two per cent by 2026.
Meanwhile, economists at TD expect the central bank to front-load interest rate cuts in the first half of this year, bringing its key rate to 2.25 per cent from the current three per cent by spring, according to a report published Wednesday.
“The Bank of Canada has already proven more aggressive when it comes to rate cuts,” the report stated, “we suspect this will remain characteristic with an economic forecast closer to treading water than south of the border.”
With the fate of the tariffs still up in the air, however, economists say it is likely the Bank of Canada will not cut its key rate at the next meeting on March 12.
“It doesn’t want to cut too much too quickly in order to get ahead of a threat that may not actually be acted on,” explained Bartlett.
Asked about the upcoming decision, Macklem said central bankers will make the final call as more information becomes available in early March.
The governor also expressed support for reducing interprovincial trade barriers as a way to strengthen the Canadian economy.
“If you are a business and you want to trade across the country, well, if you have to comply with separate regulations in 10 different provinces and three more territories, that’s going to raise your cost and so that trade looks less attractive,” he said, having earlier emphasized the need for a “concerted focus.”
