MNI BOC WATCH: Seventh Rate Cut Expected Amid US Trade War
MNI (OTTAWA) - Canada's central bank is seen lowering interest rates for a seventh consecutive meeting Wednesday as U.S. tariff hikes damage exports and investment, overwhelming domestic momentum from past cuts.
Eighteen economists surveyed by MNI see a quarter-point cut to 2.75% in the decision due at 9:45am EST, well ahead of the four who expect a pause. Several shops switched their call to a reduction in the last week as Donald Trump said he intends to set a 25% tariff on most imports from Canada in coming weeks.
Canada sends three-quarters of its exports to the United States, and those suppliers account for one in ten jobs. BOC officials have said there is some room to lower rates in a prolonged trade war that would stall growth for two years, with officials mindful of ensuring that any price boost remains a one-off. (See: MNI INTERVIEW: BOC To See Trade War As Normal Recession- Tombe)
Governor Tiff Macklem has said even the early tariff threats are harmful, telling reporters after a Feb. 21 speech that “it becomes difficult to separate what could be from what will be."
Exports would fall 8.5% and investment 12% in the first year of a dispute while a weaker Canadian dollar only partly offsets that weakness while boosting import prices, according to staff estimates.
DOVISH STATEMENT TONE
Former Governor Stephen Poloz has said a trade war could bring a 20% depreciation in Canada's dollar, though Macklem has suggested he's far from the limit of how far he can diverge from Fed officials looking at steady rates to tackle sticky inflation.
Another quarter-point cut would take the gap between Canada’s policy rate and the bottom of the Fed’s target range to 150bps, the widest since 1997. The gap was 250bps that year, a record under the BOC’s inflation targeting regime.
The Bank's rate cuts since June from 5% are already leading the G7, though they have helped restart a struggling economy and kept inflation from swooning below target.
With Prime Minister Justin Trudeau expected to resign in favor of former BOC and BOE Governor Mark Carney in coming days, it's unclear how much fiscal policy will fill any dip in demand. (See: MNI INTERVIEW: BOC To Drop Rates In Trade War: Homebuilders)
Monetary policy cannot undo permanent damage from a trade war but only smooth the transition, Macklem has said. Minutes from the Bank's Jan. 29 decision showed officials see exporters at risk of going out of business in a long dispute.
"Another 25bp is prudent even if tariffs are ultimately dropped, and we look for the statement to take a dovish tone," TD Securities strategists said in a research note.