MNI INTERVIEW: Canada Needs More Than One Rate Cut-Ex Dep Lane

The Bank of Canada needs to cut interest rates further in coming months even after dropping guidance pointing for more stimulus, former deputy governor Tim Lane told MNI, pointing to economic damage from U.S. tariffs and unusual currency strength restraining inflation and growth.

“It's rare that there's only one cut,” in an economic slowdown, Lane said. Governor Tiff Macklem lowered the key rate a quarter point to 2.5% Wednesday and dropped a phrase about potential easing. “There has been a shift in the balance of risks and I think typically that would be associated with possibly more than one cut.”

Reasons for the BOC’s caution include Donald Trump's unpredictable trade demands which led the Bank to abandon a regular forecast in favor of economic scenarios, Lane said. Canada's prospects have weakened but more time is needed to see if elevated core inflation settles down and how companies and households adapt to tariffs, he added.

“Given the fluidity of the situation I think it’s not surprising that they don't want to do anything looking like they're on an escalator," of rate cuts, Lane said. "It’s still something that has to be engaged with each meeting.”

Before the trade war Canada sent three-quarters of exports to the U.S., supporting about one in 10 Canadian jobs. Canada's trade deficit has reached record highs and unemployment is the highest in a decade outside the pandemic. 

KEEPING EXPECTATIONS LOW

Another drag is the Canadian dollar's resilience this year, a break from its past "shock absorber" role where it often plunged in downturns, boosting demand for exports while making imports more expensive. The "loonie" has climbed to about 72 U.S. cents from 69 cents this year, though it has weakened about a cent since July.

"If the Canadian dollar were depreciating more, then you would see more of the upside risks on inflation," Lane said. “There's a bigger negative impact on the real economy from unemployment and output from the tariffs and the related uncertainties.” (See MNI INTERVIEW: Job Losses To Rise Even With BOC Cut-Union Boss)

Lane, also a former IMF official, agreed some of the Canadian dollar's resilience relates to Donald Trump's moves to reshape the Federal Reserve and statistical agencies. “So far that's been reflected a little bit in the dollar and longer-term bond markets, but you can certainly well imagine a tipping point where there would be a much bigger shift of activity out of the U.S. dollar. And if that were to happen, there could be quite massive effects on the global economy.”

U.S. trade tensions have spurred action to boost Canadian competitiveness, Lane said, though he echoed Governor Tiff Macklem's comments from a podcast last week about a questionable track record following through on tough reforms. "It could be one of these situations where we actually can use that external threat productively," Lane said. "If it does help us get our act together, that's a mitigating factor but things aren’t going to be better than they were before.”

Macklem won't be tempted to slash rates so much it threatens his single inflation mandate, Lane said, noting some work remains to get core CPI firmly back down. Some measures of price expectations remain somewhat elevated from the post-pandemic surge, he said. “After an episode like this the central bank can’t let expectations ramp up.” (See MNI INTERVIEW: Mild Stimulus Cures Canada Recession- Ex-Clerk)