MNI:BOC Polls Showed Less `Catastrophic Outcomes' From Tariffs

Firms have been telling Bank of Canada officials the U.S. trade war isn't turning into a worst-case scenario, Deputy Sharon Kozicki said Thursday, part of the reason policymakers held interest rates Wednesday even with a large minority of economists calling for stimulus now to fend off a recession. 

"While uncertainty remains high, there was less talk of catastrophic outcomes," Kozicki said in a speech to the C.D. Howe Institute in Toronto. Last week that think-tank's shadow monetary council called for a cut in Wednesday's decision.

The Bank held its key rate at 2.75% and said a cut may be justified later if the economy weakens and inflation remains under control, noting core prices have been elevated. Economists on balance predict the Bank will cut rates two or three more times this year to follow up on its earlier seven reductions since last June as Canada falls into a technical recession. 

Kozicki's speech balanced concerns about slower growth with inflation risks. She mentioned business surveys showed "firms spoke about their costs increasing, which likely means they will need to raise prices at some point." Governor Tiff Macklem showed unease in Wednesday's press conference with a recent quickening of core inflation, which has moved above the top of the Bank's 1% to 3% target range. 

Officials are making greater use of survey and real-time data since the pandemic showed their value, such as restaurant reservations, credit card transactions, flight bookings and online job ads. The Bank more recently is focusing on the volume of trucks and ships moving between Canada and the U.S. "The numbers aren’t encouraging. As one example, the number of trucks crossing the border both to and from the United States dropped sharply in April," she said.

Another part of information gathering is a recent meeting with executives at automakers, exporters and manufacturers, Kozicki said. Given manufacturing is a primary target of Trump, executives telling Bank officials there is no economic cliff coming lines up with investor sentiment the President won't stick to his threats. Canada sends three-quarters of its exports to the U.S. and those suppliers account for one in ten jobs.

Traditional data showed evidence of a resilient economy before the latest rate decision as well. GDP grew at a 2.2% annualized pace in the first quarter even as tariff threats escalated, about half a point faster than the Bank's forecast. 

The speech provided survey data through May showing business sentiment fell through the first quarter and weaker sales expectations. That was underlined Thursday when StatsCan reported measures of the trade balance swung from a record high a few months ago amid stockpiling to a record low in April as tariffs kicked in. 

A separate consumer survey the Bank conducts also showed a combination of worries around a weaker economy and faster inflation. "People working in sectors that rely on exports to the United States are increasingly concerned about their job security," Kozicki said. "With all the talk about tariffs, consumers’ inflation expectations over the next year or two have recently increased."

Macklem told reporters Wednesday the economy remains somewhere in the middle of its two scenarios based on the intensity of the trade war, where GDP stalls or contracts this quarter. Trade war or not, cutting borrowing costs again when it's unclear why core prices have been sticky could put the Bank's reputation at risk again if tariffs create a burst of inflation seen after the Covid rebound.