MNI INTERVIEW: BOC Holds With Broader US Tariff-Senator Gignac

The Bank of Canada is more likely to hold interest rates this year after the U.S. broadened metals tariffs, but will hike quickly if higher oil prices turn into sticky inflation, Senate Banking Committee Chair Clement Gignac told MNI after he oversaw a hearing with Governor Tiff Macklem.

“Given the upside risks and downside risks, I think the Bank of Canada is on hold for a while now,” said Gignac, also a former Quebec minister and adviser to the federal finance department. Most economists see a hold this year while investors are betting on perhaps two hikes. 

“The Bank of Canada has to remain agile and on standby because they have some upside risks and downside risks, we don’t know what’s going on in the Middle East and with CUSMA,” he said, referring to North American free trade talks. (See: MNI INTERVIEW: BOC Inflation Patience Is Warranted- IMF Rep)

Governor Macklem reiterated to lawmakers Wednesday that if oil prices return to normal the current 2.25% policy rate is in about the right place. While new trade penalties could require stimulus, he said the Bank may need "consecutive" hikes if oil prices become sticky inflation.

NOT WHAT KEEPS YOU ALIVE

“No complacency: if we have prices continue to increase and stay very high and inflation expectations start to rise, the Bank of Canada is ready to act and become less accommodative, that is my reading of this testimony,” Gignac said. “They have learned their lesson post pandemic and I think they are ready to move if inflation expectations start to rise and you have more transmission from gasoline to transportation to other goods and services.”

The resiliency of Canadian firms to tariffs will be further tested after U.S. President Donald Trump last month broadened 50% levies to some entire products rather than just particular components with copper, aluminum or steel, Gignac said. Some companies that tried to hold out since most tariffs were imposed more than a year ago are starting to lay off workers and shut operations, weakening the labor market, he said. 

"Even if governments provide additional loans, at the end of the day it’s not necessarily what keeps you alive," Gignac said.

Prime Minister Mark Carney earlier this week announced an expanded loan program for firms hurt by tariffs. Carney has also resisted opposition calls to get a deal fast with Trump, an approach Gignac agrees with. 

START TO TAKE OFF?

Trump has little reason to slash trade with Canada while American executives and voters are upset about higher prices, Gignac said. “It’s probably better what we’re doing right now, just to wait, and in the meantime accelerate trade diversification,” he said.

Recent trade data showed non-U.S. exports at a record high, though they are far short of what firms used to send south of the border. In an optimistic scenario, Canada's economy can even "start to take off" again if global shipments keep growing at their recent pace, Gignac said.

That would be a big shift from last year when economists bet on Canada falling into recession after tariffs were set.  

“So far it’s encouraging. The Canadian economy is much more resilient than I thought a year ago,” Gignac said.