MNI Post-BOC: Growing Trade Concerns Could Slow Normalization

By Yali N'Diaye

     OTTAWA (MNI) - Amid renewed threats from U.S. President Donald Trump, this

time targeting steel and aluminum imports to the U.S., the Bank of Canada is

growing uneasy, which could slow down the normalization process going forward.

     In a widely anticipated decision, the BOC left its overnight target rate

unchanged at 1.25% Wednesday and reaffirmed its "cautious" and data dependent

approach.

     --TRADE FEARS

     Top among the concerns that support the cautious tone is the rising threat

of protectionism. 

     "Trade policy developments are an important and growing source of

uncertainty for the global and Canadian outlooks," the BOC said in its

statement, giving it a more dovish tilt than in January.

     Trump said the U.S. will impose a 25% tariff on imported steel and a 10%

tariff on imported aluminum, with media reports citing the possibility of a

detailed plan as soon as Thursday, that could include waivers for some

countries.

     Canada and Mexico could benefit from such a waiver, Trump said. However, he

tied the decision to  reaching a deal on NAFTA that would satisfy U.S. demands. 

     Such developments show protectionism is going beyond words and becoming

more real and more widespread as Europe threatened to retaliate.

     In addition, such developments arise after Trump already said in a tweet

last Friday that trade wars are "good, and easy to win".

--DISAPPOINTING TRADE DATA 

     Adding to the case for caution, goods trade data published Wednesday, while

showing a narrowing of the deficit to C$1.9 billion in January from C$3.1

billion in December, showed weak details.

     Exports fell 2.1% to C$45.8 billion, with volumes down 3.6%, the largest

drop in three years. Illustrating the widespread nature of the decline, exports

were down in 7 of 11 categories, challenging the BOC's growth rotation scenario.

     Regionally, exports to the U.S. fell 2.9% after edging down 0.4% in

December.

     On the import front, overall imports fell 4.3%, with volumes down 3.9%, the

largest drop since October 2016. In particular, sales of industrial machinery

and equipment - an investment-related import - fell 11.3%. That being said,

imports in this category were boosted in the previous two months in anticipation

of new regulations in effect since January 2018.

--EYEING CAPACITY, HOUSING

     Overall, however, the BOC concluded, as it did in January, that "While the

economic outlook is expected to warrant higher interest rates over time, some

continued monetary policy accommodation will likely be needed to keep the

economy operating close to potential and inflation on target."

     For now, inflation is still running around the 2% target, the statement

said, although core inflation has been edging up, along with wages growth.

     On the capacity front, although the economy is "operating near capacity",

the BOC pointed out that the fourth quarter import gain reflected stronger

business investment, which, in turn, "adds to the economy's capacity." This

could suggest the central bank now sees more room for the economy to grow

without adding inflationary pressure, giving breathing room to continue to wait

to assess the economy's response to higher interest rates.

     The housing market is particularly on the BOC's radar screen. But "it will

take some time to fully assess the impact" of tighter mortgage rules in effect

since January and recent provincial measures on housing prices and demand, the

BOC said.

--MNI Washington Bureau; tel: +1 202-371-2121; email: kevin.kastner@marketnews.com

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