Policy-makers warn trade and Fed risks cloud outlook for growth, inflation and investment
Uncertainty around the Bank of Canada’s next move on interest rates has “little historical precedent,” a message that matters for anyone making long‑term funding and asset‑allocation decisions.
According to BNN Bloomberg, the governing council kept its policy rate at 2.25 percent in January and said the economy has evolved largely as anticipated since its October monetary policy report, but the range of risks that could materially change its outlook has broadened.
Policymakers agreed “it was difficult to predict the timing and direction of the next change in the policy rate,” even though the current setting sits on the stimulative side of the bank’s estimated neutral range, as Reuters reported.
The council highlighted three key risk areas: recent geopolitical events, the upcoming review of the trade agreement between Canada, the United States and Mexico, and the economy’s adjustment to trade disruptions, according to BNN Bloomberg.
Officials described the US‑Canada‑Mexico trade review as an “important risk” that may discourage businesses from deploying capital and assessed it as a downside risk to economic growth, as reported by Bloomberg.
The most acute volatility, the bank said, comes from the United States.
The governing council pointed to recent US actions on trade, foreign policy and central bank independence as making the world “more turbulent” and escalating uncertainty.
In the summary of deliberations, the bank stated that “recent geopolitical events — including in Venezuela, Iran and Greenland — and threats to the independence of the US Federal Reserve had made the world more turbulent and caused a resurgence in uncertainty.”
It added that “US trade policy, increasingly used for geopolitical aims rather than economic ones, had become more unpredictable.”
Reuters said the minutes warned that escalating tensions could disrupt global supply chains and weigh on economic activity, posing both upside and downside risks to inflation.
In this environment, the rate‑setting team said it was “unusually difficult to effectively assign weights and probabilities to the various risks surrounding the outlook on the economy and inflation,” and members agreed they needed to maintain “optionality” in setting monetary policy.
Bloomberg reported that the Bank of Canada has also become more vocal about political pressure on the US Federal Reserve.
Governor Tiff Macklem publicly backed Fed Chair Jerome Powell after Powell warned that a US Department of Justice investigation threatened the institution’s independence, and Macklem said the era of rules‑based free trade with the US is over.
The Bank of Canada’s next interest rate decision is scheduled for March 18.
