MNI INTERVIEW: BOC Seen On Hold For Rest Of This Year- Stillo

Canada's central bank will keep interest rates on hold for the rest of this year because inflation risks from U.S. tariffs are too great, a former official from the country's largest province and manufacturing heartland told MNI.

“The bank is going to be very pragmatic and remain on hold,” Tony Stillo, former forecasting manager at Ontario’s finance ministry and now Canada Director at Oxford Economics, said on MNI's Fedspeak podcast. “The Bank has said clearly they cannot tackle this potentially stagflationary hit from the trade war and tariffs, so the potential increases in prices and the downturn in the economy, both at the same time."

The Bank of Canada held the overnight rate at 2.75% last Wednesday after seven consecutive reductions and said it will be more cautious given competing risks to the outlook. Governor Tiff Macklem also said that while a recession is possible in a deep trade war, President Donald Trump's latest move to pause some levies lowers the risks back to a more moderate scenario, underlining it's essential to keep a lid on price expectations. 

“They're worried about potentially second-round effects of higher inflation,” Stillo said. Tariffs resemble the kinds of supply shocks seen during the pandemic, according to Stillo. During that period inflation surged 8% in Canada and central banks globally were criticized for being slow to react. 

“I don't think the Bank wants to be behind the curve like they've been accused of post pandemic, where those supply disruptions led to this surge in inflation,” Stillo said.

POTENTIAL FOR BETTER 

That's even with his projection that Canada is falling into a year-long recession where unemployment climbs towards 8% and output declines a cumulative 1.3%. The GDP decline is about half of a normal downturn, he said, another indication the Bank would need to see much worse before providing fresh relief.

“They could lower maybe a couple more, 25 basis points to the bottom end of their neutral range,” he said, “only if they were convinced that inflation will remain controlled, and additional monetary stimulus is required to support economic growth.” Another few rate cuts this year is the scenario most economists surveyed by MNI in the last week have suggested, with many also seeing a technical recession. (See: MNI INTERVIEW: June BOC Cut Likely After Surprise Hold-Beaudry)

Stillo's forecast incorporates more of the fiscal stimulus Liberal Leader and former BOC and BOE Governor Mark Carney has offered on the campaign trail ahead of the April 28 election. While Conservative Pierre Poilievre has offered less stimulus “they're both saying we've got to support the economy,” Stillo said. That takes pressure off the Bank to cut rates, he said. 

Rate increases are an even more unlikely scenario Stillo said. “It's not ever off the table,” he said, but would require a situation where “inflation expectations are becoming de-anchored and worrying about an ongoing process of higher inflation.”

The tariff war appears to be pushing Canada to make previously unpalatable reforms that would improve growth but not fast enough to offset the short-term hit, Stillo said. Politicians are pledging new pipelines and freer trade between provinces that have been discussing that issue since the country was founded in 1867. (See: MNI: Canada Will Struggle To Wean Off U.S. Trade Dependence)

“Our potential is to do much better, even within the country, let alone diversifying our trade with other partners across the globe. But those take time, and the tariffs if they do come on as proposed now, they would hit,” Stillo said.