MNI INTERVIEW: BOC To Cut Faster And Deeper In Trade War
MNI (OTTAWA) - Canada's central bank will ease faster and deeper if a trade war breaks out with the U.S., former Alberta and federal finance department official Mark Parsons told MNI.
“We could see a scenario where they would cut-- so instead of 2.5% by mid-year, then we get down to 2% by mid-year” from today's 3% according to Parsons, formerly Alberta's assistant deputy minister of economics and now chief economist at ATB Financial, which is owned by the province.
“They would have to prop up Canadian the economy and they will tolerate a temporary increase in inflation, knowing that it’s transitory, eventually the trade war ends, and inflation would be back to 2%,” Parsons said in an interview. (MNI INTERVIEW: BOC To Slash Rates If Trump Forces Tariffs)
Bank of Canada Governor Tiff Macklem cut rates for a sixth consecutive meeting Wednesday, though slowing the pace to a 25-basis-point reduction after two prior 50bp moves, and saying a trade war would be a major disruption. Parsons said the decision's many references to damage from tariffs and a staff estimate that these would take 2.5pp off Canada's growth is "basically putting us in a recession." The statement's removal of previous language about shifting to gradual rate relief is also significant, he said.
DIFFERENT WORLDS
Differences between the Bank's status quo forecast and a trade war are “almost two different worlds,” Parsons said.
The Bank’s scenario of damage from a trade war is similar to results ATB modeled out last month, Parsons said. The expected setback also means comments from a federal minister talking about a return to relief checks sent out during Covid is exaggerated. “It’s nowhere close to the Covid-type shock that we experienced before on the economy. So I don’t feel like it would warrant that same type of fiscal response,” Parsons said.
Macklem will also benefit from taking some time to assess after the early response, Parsons said. “The Bank of Canada lowering rates, you want to make sure that they can do so without any other inflationary pressures creeping up.”
One of those price pressures relates to Alberta's major crude oil reserves. Donald Trump says he could exempt oil from his 25% tariff, but Canadian Prime Minister Justin Trudeau has signaled a retaliatory oil export tax. Canada re-imports crude refined into gasoline so “we would be hurting ourselves,” with an export tax, Parsons said.
OIL AND TROUBLE
Even if Trump on Saturday again delays the tariffs he had promised on Inauguration Day, Canada faces a chill from his threats. "They're already having an impact on both the Canadian dollar and on business investment,” Parsons said. Canada's dollar has recently weakened close to nine-year lows. (See MNI INTERVIEW: Canada Already Chilled By Trump Tariff Threat)
Satisfying Trump is tricky because he mixes security with trade, and his desire for Canadian oil with the argument America is being hoodwinked when the U.S. has a surplus beyond energy, Parsons said. “The trade deficit is not a proxy for how much they're getting ripped off, it’s actually a sign of strength. It means you have such a strong economy that the consumer can import the things that you don't produce,” he said.
Trump at times has signaled he would back another attempt at the Keystone XL pipeline and that "would provide a lot of upside to Alberta," Parsons said, adding that the challenge remains “getting the private sector back in the game on that project” after Joe Biden canceled it.
Similarly, while some officials have touted Canada refining its own oil rather than shipping crude south, "it takes years to build a refinery, and if you look at how much we ship to the U.S., 1.4 million barrels per day of crude, we just don't have anywhere close to that refinery capacity.”