CANADA: BoC Presser Highlights: Removed Rate Guidance Due To Uncertainty
The Bank is stepping up its outreach activities amidst particularly high uncertainty to help monitor latest impacts from any potential tariffs. It wants to narrow down the current "zone of uncertainty" it currently faces and didn't see the worth in providing rate guidance.
Q: BoC’s role in a trade war
Macklem: There are some things that are pretty clear - a protracted trade conflict would badly hurt the Canadian economy, with the whole path of the economy lower. Inflation will be higher on the other hand, it’s a complex shock. We’ll be assessing the trade-off between softer growth and higher inflation, with Macklem mentioning two-sided scenarios where one impact outweighs the other (starting with the weaker aspects outweighing). Alongside our scenario analysis, we’re stepping up our outreach activities with businesses and households.
Q: You said that the scenario in the MPR is a very severe one. If the 25% tariffs come in, is it the Bank’s base case that there will be a recession and higher inflation?
Macklem: It is a severe scenario. The US puts 25% tariffs on every country, not just Canada, and every country responds, plus it’s permanent. It shows two things: 1) most of the simulations were 2.5-3pps lower GDP growth in the first year, which would likely mean a recession, 2) exactly what happens is quite sensitive to model parameters, including how Canadians and Americans respond. As we said, we don’t have a lot of good examples to observe. We’re trying to show it would have a very material effect but there is a certain zone of uncertainty re exactly how quickly and how big. We’re going to try to narrow down that zone going forward.
Q: How should we interpret the removal of rate guidance from the statement?
Macklem: It’s simple. There’s a lot of uncertainty out there, it didn’t seem useful to provide guidance.