MNI INTERVIEW: Tariff Uncertainty Means Lower BOC Rates- Ragan

Damage to Canada's economy from the uncertainty of shifting U.S. tariffs will lead the BOC to cut interest rates modestly in coming months, former central bank and finance department adviser Chris Ragan told MNI.

“This is a real killer economically, that uncertainty is just a huge detractor for investment,” said Ragan, who now teaches at McGill University. That's even with a few rounds of pauses or rollbacks of penalties on Canada, he said. 

Scope for rate cuts is limited because monetary and even fiscal policy are poor substitutes for trade negotiations, Ragan said. Precise forecasting of where exactly the policy rate ends up this year is almost impossible given the wide range of economic outcomes, Ragan said.

Governor Tiff Macklem held the key rate at 2.75% last month following seven prior cuts that were the fastest in the G7 as inflation settled back to the 2% target. Officials say there's less scope to offer forward guidance as they assess whether tariffs bring a bigger shock to inflation expectations or economic growth. Macklem also says he can be nimble if it becomes clear where things will break.

BEING DECISIVE IS HARD

“Being decisive is going to be hard here, because you know you're going to have these two offsetting forces,” Ragan said. (See: MNI INTERVIEW: June BOC Cut Likely After Surprise Hold-Beaudry)

“If the U.S. tariffs persist, I think rates in Canada will go down, not that that's necessarily, by the way, the great thing to do," he said. "If the fundamental problem is uncertainty, if firms aren't investing because of uncertainty, they're not going to all of a sudden invest because interest rates dropped by 50 basis points.”

Economists surveyed by MNI see two or three more cuts this year and there's already evidence of Ragan's point that tariff uncertainty alone is harmful. Even with Trump easing some of his tariffs on Canadian autos, two assembly lines have curtailed production in recent weeks. 

With many economists saying bigger deficits pledged by Prime Minister Mark Carney could take pressure of the Bank to cut rates, Ragan said fiscal action will also struggle to revive growth. 

“It's not always so easy to say that firm is going through trouble because of the tariffs, as opposed to that firm is going through trouble because it wasn't very well managed," Ragan said. "Or that worker got laid off because of the tariff.”

TRUST SLOW TO REBUILD

Carney, a former BOC and BOE Governor, visits President Donald Trump Tuesday. The PM says every dollar of retaliatory tariffs will go to workers hurt by the trade war and he will seek leverage by internal reforms that boost GDP by more than is lost to tariffs.

“It’s a nice line; I’m not sure it’s right,” Ragan said. “If we could wave a magic wand and have internal free trade, wow, great. And if you believe the IMF’s numbers, then we'll have a 4% jump to GDP. But we're not going to get this done with a magic wand.”

While it's true Canada sells the U.S. vital products like potash and aluminum, the best hope is Americans protest tariffs, Ragan said. “It will be the consumers and the consumer groups and the businesses in America that are hurt from those tariffs, who will then go to either Trump or Trump's people and say, Look, this is hurting us.” (See: MNI INTERVIEW: Tariffs Add Up To USD12,000 To Car Prices- Exec)

Even a promise from Trump to end to the trade war won't rebuild confidence of firms investing in Canada, Ragan said. "Who would believe that?"