Bank of Canada bakes 0.1 per cent Trump bump into its outlook for the economy
The Bank of Canada has started to bake a modest Trump factor into its Canadian economic forecasts.
And the loonie’s charge higher is worrying policy makers at the Bank of Canada which held interest rates today. Read on
The Bank on Wednesday held its trendsetting overnight interest rate at 0.5 per cent, citing global economic uncertainty and continued slack in the Canadian economy.
It also released a Monetary Policy Report that sets out its latest forecasts for Canadian economic growth. The bank predicts Canada’s economy will grow 2.1 per cent in each of 2017 and 2018. The Canadian economy, which has struggled following the downturn in oil and commodity prices, should return to full capacity around mid-2018, the bank said.
The bank’s forecast also considers the impact that president-elect Donald Trump’s new administration will have on Canada’s economic prospects. Trump won the U.S. presidential election on promises to cancel or renegotiate the North American Free Trade Agreement, cut taxes, and boost infrastructure spending.
“In our discussions, Governing Council was particularly concerned about the ramifications of U.S. trade policy, because it is so fundamental to the Canadian economy,” Bank of Canada Governor Stephen Poloz told reporters Wednesday.
Poloz said it is tough to pin a value on policies it has yet to see, but the bank decided it would be reasonable to assume Trump’s actions will add 0.5 percentage points to U.S. GDP by the end of 2018. Ordinarily, what’s good for the U.S. economy is good for Canada. But Poloz cautioned that Trump’s policies will have a only muted impact on Canada, adding just 0.1 percentage points to Canadian GDP by 2018.
Trump’s promise to boost infrastructure spending could kick start demand for Canadian-made equipment and services, Poloz said. But three factors could reduce that, he added. Trump’s promise to lower taxes could make the U.S. a more competitive destination for foreign investors. Bond yields have risen since Trump’s election, and this could hike mortgage rates and slow Canadian housing markets. Finally, the loonie has held its own against the U.S. greenback, creating headwinds for Canadian exports.
The bank also cautions in its Monetary Policy Report that its forecasts for Canadian, U.S. and global economic growth are subject to uncertainty over what Trump might do as president, particularly on trade.
The concerns over uncertainty caught the attention of economists. “Overall, we judge the commentary is neutral, though the bank highlights that uncertainty remains elevated which could change the outlook in a hurry,” said Benjamin Reitzes, senior economist with BMO Capital Markets.
“Caution is once again the key to the Bank of Canada’s thinking. Heightened uncertainty and the remaining economic slack both point to a bank that is likely to maintain its policy rate at 0.5 per cent for some time to come,” said Brian DePratto, senior economist with TD Economics.