MNI INTERVIEW: Trade Woes Mean BOC Stagflationary Risk-CD Howe
Canada risks a combination of sluggish growth and sticky inflation as the central bank aims to keep interest rates around neutral in order to leave room to respond to the outcome of U.S. trade talks, the head of a shadow monetary council told MNI.
“I’m going to be interested to see if we end up in these kind of stagflationary scenarios,” said C.D. Howe President Jeremy Kronick. The Toronto-based think-tank runs a shadow monetary council and its membership includes many former top central bankers.
The Bank of Canada's kept its policy rate at 2.25% Wednesday, which Kronick said isn't just at the low end of the official real neutral range but actually negative compared with headline inflation. The Bank has lowered rates from 5% as the Covid inflation surge ended and this is a phase with more conflicting data and continued U.S. policy turmoil, he said.
“I don’t think you want to do much more in this kind of environment. You’ve just come back from an inflationary surge," Kronick said. “The right move is to hold.” (See: MNI INTERVIEW: BOC Hold This Year As Economy Rebuilds-Mc Mahon)
WEAK LABOR MARKET
Governor Tiff Macklem said Wednesday he intends to hold rates if a base case of modest growth and inflation over the next two years is realized. While it's unclear what the next rate move might be, Macklem said he also sees a big risk from trade talks.
There's less reason for optimism about Canada outperforming growth expectations again this year, and a lot more work is needed to fix longstanding productivity and investment weakness, Kronick said.
“Third quarter GDP was weak, fourth quarter GDP looks like it’s weak, the labor market under the hood I think it’s also fairly weak,” he said. “A lot of the resilience we saw in 2025 is starting to run out.”
EXPECTATIONS RISK
High-profile inflation pockets also persist especially for groceries and that creates some risk that price expectations will become unanchored, he said. (See: MNI INTERVIEW2: Food Prices Still Problem Across G7- Champagne)
“I haven’t seen any data suggesting that they’ve become de-anchored, yet, but that always is the worry,” he said. “You can only look through certain inflation elements for so long.”
Canada’s finance minister also told MNI this week leaders across the G7 are concerned about food inflation, and Francois-Philippe Champagne opened Parliament this week with a new grocery tax rebate.
Several times when asked about stagflation, Macklem has said conditions these days are nothing like the 1970s. Inflation averaged more than 7% in that decade and unemployment was also often in that range.
In the near term, investors are split on a potential interest-rate cut in coming months as trade conditions worsen or a hike late this year as inflation pressures emerge. Such forecasts are more difficult in this uncertain environment, Kronick said.
“There’s a number of things happening on both sides; and it could go in different ways," Kronick said. “You’re best to keep the powder dry and keep reassessing.”
