MNI INTERVIEW: Trade Delays BOC Hike Until Late 2027-Stillo

The drag from U.S. tariffs remains the key risk for Bank of Canada policymakers, likely delaying any rise in interest rates from Governor Tiff Macklem until late next year despite the inflation threat from higher oil prices, a former official from the country's largest province told MNI.

U.S. President Donald Trump's failure to renew the USMCA pact on July 1 and opt for annual reviews puts more focus on damage to Canada's exports and investment says Tony Stillo, former forecasting manager at Ontario’s finance ministry now at Oxford Economics. The Iran conflict remains a risk but has yet to disrupt long-term inflation expectations Macklem has focused on as a condition for hikes  Stillo says.

“Slack in the economy is one of the reasons you're not going to see inflation get out of hand, even with the what we've seen to date with oil prices,” Stillo said. (See: MNI INTERVIEW: Carney-Trump Deal Will Include Tariffs-Chamber)

Growth and the labor market will remain weak through this year while business activity shows a mix of gains in commodity firms and more hesitation to spend by firms linked to U.S. trade, he said. Before the levies on steel, aluminum and autos, three-quarters of Canada's exports went to the United States.

POLITELY COMMUNICATING

Macklem's last rate decision said significant new U.S. penalties could require a cut to the 2.25% rate, but also that if inflation spreads beyond energy prices he may need consecutive hikes.

“They're politely communicating that monetary policy is caught in a bind -- they use the word dilemma -- because they can't address the dual factors at play in both the Iran-U.S. conflict and its fallout for higher prices and weaker economy. The same thing with what could happen with a trade deal,” Stillo said.

That wide range of guidance matches the unusual times the economy is in, and Stillo said officials will remain guarded even when the economy starts taking a clear direction. (See: MNI INTERVIEW: BOC Can Delay Hike To Neutral Til 2027-Mc Mahon)

“I don't think they'll just say that we're moving towards this,” he said. "They don’t want to be burned, and I think they're going to be prepared to still say, you know, we're living in uncertain times.”

EASING BIAS

“The worst scenario for Canada or any country globally is a poly-crisis, where all of these things happen all at once. That's where you really get some turbulence, to say the least.” 

In a scenario without a long rate hold, Stillo's view is the cut scenario is more likely because of the slow recovery from the tariff hit. 

“I think there's an easing bias,” he said. “The Bank is going to be nimble and respond to whatever the economy needs. They're in a reasonable place now.”

“Hopefully the Iran situation is largely contained, but that's why they were saying we could hike if we need to. If that's what the economy needs for stable prices and stable inflation and the best for the economy overall, then they'd hike.”