MNI REVIEW: BOC Shuns Rate-Cut Talk, Says Trade Wars Lift CPI

By Greg Quinn

     OTTAWA (MNI) - Bank of Canada officials this week avoided echoing Federal

Reserve chief Jerome Powell's move toward a rate cut, taking the trade-war

debate in the other direction by saying huge new tariffs would bring a burst of

inflation.

     The Ottawa-based central bank held its key rate at 1.75% Wednesday in a

statement that said some stimulus is "appropriate," while Governor Stephen Poloz

at a press conference didn't directly comment on questions about a cut. Around

the same time Powell said Fed stimulus could be needed even as the United States

and China resume trade talks and shelve threats of 25% tariffs.

     Inflation is already a unique problem for Canada with price gains running

above the Bank's 2% target, versus a Fed struggling to bring its preferred

measure up to that mark. Smaller economies like Canada that rely on commodity

exports face even bigger inflation risks in a global tariff war that would

trigger a plunge in local currencies and drive up import prices. 

     "It's clear that monetary policy could not simultaneously buffer the impact

on growth and keep inflation in check. Central banks in advanced economies have

not faced this type of trade off since the 1970s," Bank of Canada Senior Deputy

Governor Carolyn Wilkins said at start of the press conference with Poloz.

     The 1970s were an era of "stagflation" where OPEC's rise to power and other

policy changes triggered rising prices and slower economic growth, though BOC

officials didn't use that term Wednesday.

     Bank of Canada economists simulated an "extreme downside scenario" on trade

and found it reduced global GDP by 3% by the end of 2021 relative to a base-case

scenario. Canadian output would be 6% lower and year-over-year inflation would

rise by as much as 3 percentage points. The scenario in the bank's Monetary

Policy Report doesn't address potential further pain from any climb in inflation

expectations.

     "We shouldn't I think go into this assuming that central banks can somehow

fix this, if this is what occurs," Poloz said about a major trade war at the

press conference. "It would be a very difficult place for policy, and my sense

is that the markets aren't really onto the complexity of it." 

     Poloz also referenced the past struggles of the Fed under Paul Volcker to

control inflation after the shocks of the 1970s. "Central banks kind of

misinterpreted that and thought that they could lean into it and keep

unemployment from rising, and it turned out they really couldn't and we had a

big bout of inflation that took until the Volcker years to erase," Poloz said.

     Of course, the BOC's main projection is for inflation to return sustainably

to the 2% target around the middle of next year. That's one reason many

economists surveyed by MNI predict there will be no change in Canadian rates in

either direction this year, regardless of what the Fed does.

--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com

[TOPICS: M$C$$$,MI$$$$,MX$$$$]