MNI INTERVIEW: BOC Faces Recessionary Risk On Tariff Hit: Lane
MNI (OTTAWA) - Canada's economy could slip into recession if U.S. President-Elect Donald Trump goes ahead with the 25% tariff he unveiled this week, pressuring the BOC to contemplate another jumbo interest rate cut that would set it further apart from the Federal Reserve, former Deputy Governor Tim Lane told MNI.
“If we get a big negative shock like this, then that could be an additional reason for the Bank of Canada to have a less optimistic view of the economy. It would be almost inevitable that they would be revising its view of the economy downwards, and that would apply to divergence between the U.S. and Canada," Lane said in an interview.
"Whether they need to make another 50 basis point cut is obviously something they will be looking at, they will be thinking about next week," he said.
"Before the tariffs there are some good reasons for divergence--the U.S. has a much bigger fiscal stimulus still, and the fact that our housing market has been a drag on the Canadian economy." (See: MNI INTERVIEW: BOC Primed For Another Jumbo Cut- Ed Devlin)
Governor Tiff Macklem has lowered rates four times this year including a half-point move last month while the Fed cut rates twice, starting with a 50bps cut in September and then another 25 bps this month. The gap in rates has been 100bps at times this year and grew to 250bps in the 1990s. Macklem has said he's nowhere close to the limit of divergence even as Canada's dollar has weakened.
RECESSION RISK
Investors have been split since the Bank's large October rate cut on whether there would be another one in December, and Lane said at some point in this cycle another 50bp move wouldn't come as a terrible surprise. Bank officials said in October they could do more to remove tight policy because of confidence inflation is settling back at their 2% target.
“If (the economy) remains in excess supply that’s going to be pulling down inflation below the 2% target, and so they see a need to lower rates further," Lane said. “That’s I think a pretty plausible reason for expecting rates to go lower from where they are now, and that’s certainly what they’ve been saying."
President-elect Trump's threat of a tariff on everything from Canada upon taking office becomes dangerous if it's a policy that stays in place for a while, Lane said. “If it lasts more than a few weeks I think we’re going to see big impacts on the Canadian economy, and those I think on the whole will be recessionary,” Lane said. Manufacturers and oil producers could be hard hit, he said. (See: MNI INTERVIEW: BOC Has Room To Keep Cutting By 50BPS: Senator)
IMMEDIATE CHILL
Trump's announcement puts an immediate chill on business investment, even as some resilience in Canada's dollar this week suggests investors see the move as a bluff, Lane said. (See: MNI INTERVIEW: Canada Faces Trouble Under Harris Or Trump- EDC)
“It’s an announcement by somebody who’s not even president yet, at the same time it signals something that’s disturbing for the Canadian economy,” Lane said. Asked if another large rate cut would be surprising, Lane said “if that (tariff) policy is actually implemented there could be a need for a larger move,” and in any case, “at some point it would not be unusual.”
Tariffs bring complex effects including the prospect of inflationary pressure, Lane said. Some of that could come from a lower Canadian dollar if tariffs move ahead. “It would be concerning if the Canadian dollar were seen to be going into free-fall, and it’s hard to see that the Bank of Canada would be cutting rates aggressively” in that situation, Lane said.