Bank of Canada governor Tiff Macklem had planned to cover the central bank’s upcoming monetary policy framework review when he scheduled a talk in Mississauga, Ont. on Friday. Instead, like the rest of us, he talked trade.
Macklem said that U.S. President Donald Trump’s threat to apply double-digit tariffs to Canadian exports would drive our economic output down 2.5% before it starts growing again. We’re talking about a “structural change,” he said.
If the tariffs are applied broadly, for an extended period, “there won’t be a bounce-back,” he said. “We may eventually regain our current rate of growth, but the level of output would be permanently lower.”
Macklem forecast an 8.5% decline in exports, based on Trump’s threats. We’re looking at virtually zero growth this year and next, he said.
Weakening demand would throw cold water on inflation, normally. Not so in a trade war.
“In January, the Bank projected that inflation would remain close to the 2% target for the next two years,” he said, at his understated best. “Tariffs would temporarily push inflation above 2%.”
Next year’s framework review will take a hard look at how monetary policy served Canadians during the pandemic, and how it will perform should the tariffs happen.
Meantime, monetary policy can only do so much, Macklem said. “[W]ith a single instrument — our policy interest rate — we can’t lean against weaker output and higher inflation at the same time.”
