MNI INTERVIEW: BOC To Drop Rates In Trade War: Homebuilders
MNI (OTTAWA) - The Bank of Canada will need to lower interest rates in proportion to the shock coming from a U.S. trade war, the head of the Canadian Home Builders’ Association, who consults with the central bank around risks in one of the world's most stretched housing markets, told MNI.
“There are going to be big challenges,” CHBA President Kevin Lee said Tuesday when asked how far rates will decline. “We’re probably going to need to see them lowering rates.” (See: MNI INTERVIEW: BOC To Slash Rates If Trump Forces Tariffs)
“So much of our economy relies on us shipping goods to our friends south of the border, and so when that isn’t possible or becomes non-competitive, that becomes a big economic problem for Canada,” he said. “Our biggest concern is an economic slowdown because an economic slowdown would lead directly to falling housing starts.”
Weaker demand will be a much more important force than the price increases that can be expected for some products, he said. Lee said he's working with governments to make sure that retaliatory tariffs on U.S. imports will be targeted to avoid putting too much of an increase on building materials that are hard to source from elsewhere.
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"One of the things that’s on the list is appliances, we import a lot of appliances from the United States. It will be a challenge, but we also have a lot of other countries that we can import appliances from," Lee said.
In this situation how Canada's dollar fares against major currencies other than the greenback will be important, because that will determine how much some import prices rise, Lee said. With Trump threatening many other economies, there's some reason for optimism in Canada, he said. “The way Trump is going with his trade wars, everybody might be in the same situation so we could be fine there” on the currency, Lee said.
While the Bank of Canada has led the G7 on rate cuts with 2 percentage points of relief since June, only half of that has transmitted through the bond market into lower rates on the popular five-year fixed-rate mortgage, Lee said. "We really like that interest rates are coming down, we do feel they are going to need to come down further, and we are also hoping that the bond market starts to adjust," Lee said.
The BOC has a rate decision March 12, and earlier today Bank of Montreal switched its call to a quarter-point cut at each of the next four meetings to 2%. Governor Tiff Macklem says a trade war could stall growth for two years and boost inflation pressure, but doesn't need the extreme response seen during Covid. (See: MNI INTERVIEW: BOC To See Trade War As Normal Recession- Tombe)