MNI INTERVIEW: BOC To See Trade War As Normal Recession- Tombe
MNI (OTTAWA) - Any Bank of Canada interest rate cuts in response to a trade war will be similar in magnitude to those during a mild recession, according to University of Calgary economist Trevor Tombe, who earlier this year helped review the BOC’s pandemic response.
With the policy rate already at 3%, officials would be able to provide appropriate stimulus with only modest easing, in contrast to the outsized reaction during the pandemic when rates were slashed to 0.25%, Tombe told MNI in interview at a conference in Ottawa.
“They are right now near what’s called the neutral rate, and a trade war with the U.S., that would create for Canada something akin to a normal, medium-sized recession," he said. "Not something that is unusually large in terms of unemployment rise or economic disruption. That’s not to belittle the cost, but the Bank wouldn’t need to move into unusual policy tools.”
Tombe declined to speculate as to a precise path of rate cuts given Donald Trump's shifting tariff threats. But, as a comparison, the previous Governor Stephen Poloz only cut rates by 50bps in 2015 when a plunge in prices for oil gas threatened the economy.
As for the BOC’s next meeting March 12, Tombe suggested little urgency to cut rates for a seventh time to stimulate the economy in anticipation of damage from a trade war. In recent weeks more economists have shifted to the view the Bank will pause amid signs of resilient growth and inflation. (See: MNI INTERVIEW: BOC To Cut Faster And Deeper In Trade War) Statistics Canada reported Friday Q4 growth of 2.6% that was above the Bank's 1.8% forecast.
The Bank's rate cuts since June from 5% are already leading the G7 as slack put the economy on a path to stable 2% inflation. Governor Tiff Macklem has also suggested some caution, saying that while a trade war could stall growth for two years, he must prevent a one-time jump in prices from tariffs from becoming persistent inflation. (See: MNI INTERVIEW: BOC Gradualism May Withstand Tariffs: CD Howe)
NO DUAL MANDATE
Tombe lauded the Bank's announcement that its next mandate review due next year will keep the 2% target in place and instead look at other issues. He also said it seems clear whoever wins this year's election won't go further with what he called a further dangerous flirtation with a dual mandate. The reviews take place every five years and in the last one then finance minister Chrystia Freeland signed an agreement with the Bank allowing for flexibility to pursue maximum employment when the inflation target is being met.
“We absolutely shouldn’t interfere with the mandate of the Bank, like the government did in its last review," Tombe said.
“I don’t hear anyone credible any more pushing for a departure from 2%. Mark Carney is certainly not going to, nor is the opposition,” Tombe said.
The former BOC Governor Mark Carney leads the contest to replace Justin Trudeau as prime minister on March 9. His main rival in an election due by October is Conservative Pierre Poilievre, who wants a strict focus on the inflation target.
“The experience that Canadians have gone through with high inflation ought to remind us all of the value of keeping on target, and not messing with that,” said Tombe, who reviewed the Bank's Covid response alongside former Bank of Spain chief Pablo Hernendez de Cos, and former BOE official Kristin Forbes.
One of Canada's best protections against global risks is improving its lagging productivity, Tombe said. On that front Trump's threats make him optimistic governments will unlock long-delayed projects and upgrades.
“A lot of focus is on pipelines, that’s not the only challenge. Rail capacity, port capacity, interprovincial electricity ties," he said. (See: MNI INTERVIEW: Canada Already Chilled By Trump Tariff Threat)
"A lot of that is not just government or public funds but the regulatory process that’s involved in moving those projects through,” Tombe said. "The question is, how long does this momentum continue.”