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BOC: BOC Says Some Rate Cuts Can Blunt Lower Demand In A Trade War

BOC
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MNI (OTTAWA)
  • BOC Governor Macklem says Friday demand will fall more quickly than supply if high U.S. tariffs are imposed, adding lower interest rates could help ease downward pressure on demand.
  • Structural economic shifts from protracted trade friction with the U.S. would be severe, according to BOC. The shock of high tariffs would be similar to COVID-19. This time there is no possibility of bouncing back. "We may eventually regain our current rate of growth, but the level of output would be permanently lower. It’s more than a shock—it’s a structural change."
  • BOC says effects of trade conflict:
    - Reduced exports with first year seeing an 8.5% fall. 
    - Consumer spending slowdown, consumption could decline by over 2% mid-2027. 
    -Lower business investment as firms face lower sales, higher costs and reduced profits. BOC says investment projected to decline 12% by early 2026. 
  • "In our tariff scenario, the factors pushing prices up more than offset the downward price pressure from weaker demand, so inflation rises. In January, the Bank projected that inflation would remain close to the 2% target for the next two years. Tariffs would temporarily push inflation above 2%." 
  • "The initial impact of tariffs is a one-time rise in the level of consumer prices. Monetary policy cannot change that. What monetary policy can—and must—do is ensure that higher prices do not become ongoing inflation."
  • BOC reviewing flexible inflation-targeting framework which is up for renewal next year and will consider how best to respond to economic structural changes, volatility and persistent shocks.
  • However, the Bank says its 2% inflation target has proven effective in achieving price stability and would not be modified during the review. 
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MNI (OTTAWA)
  • BOC Governor Macklem says Friday demand will fall more quickly than supply if high U.S. tariffs are imposed, adding lower interest rates could help ease downward pressure on demand.
  • Structural economic shifts from protracted trade friction with the U.S. would be severe, according to BOC. The shock of high tariffs would be similar to COVID-19. This time there is no possibility of bouncing back. "We may eventually regain our current rate of growth, but the level of output would be permanently lower. It’s more than a shock—it’s a structural change."
  • BOC says effects of trade conflict:
    - Reduced exports with first year seeing an 8.5% fall. 
    - Consumer spending slowdown, consumption could decline by over 2% mid-2027. 
    -Lower business investment as firms face lower sales, higher costs and reduced profits. BOC says investment projected to decline 12% by early 2026. 
  • "In our tariff scenario, the factors pushing prices up more than offset the downward price pressure from weaker demand, so inflation rises. In January, the Bank projected that inflation would remain close to the 2% target for the next two years. Tariffs would temporarily push inflation above 2%." 
  • "The initial impact of tariffs is a one-time rise in the level of consumer prices. Monetary policy cannot change that. What monetary policy can—and must—do is ensure that higher prices do not become ongoing inflation."
  • BOC reviewing flexible inflation-targeting framework which is up for renewal next year and will consider how best to respond to economic structural changes, volatility and persistent shocks.
  • However, the Bank says its 2% inflation target has proven effective in achieving price stability and would not be modified during the review.