The Bank of Canada raised its benchmark interest rate Wednesday in an economy that it predicts will remain resilient even as it faces an even bigger bite from deepening trade tensions.
The rate hike was the central bank’s first interest rate move in six months and lifted the trend-setting rate to 1.5 per cent, up from 1.25 per cent. It was the bank’s fourth rate increase over the last 12 months.
The decision, a move that will likely prompt Canada’s big banks to raise their prime rates, arrived in the middle of a trade dispute between Canada and the United States that’s expected to hurt both economies.
The bank took the step even as it predicts larger impacts from the widening trade uncertainty, particularly after the United States imposed steel and aluminum tariffs on Canada and Ottawa’s retaliatory measures. The tariff fight, the bank estimated, will shave nearly 0.7 per cent from Canada’s economic growth by the end of 2020.
However, the bank expects the negative blow of the trade policies recently put in place to be largely offset by the positives for Canada from higher oil prices and the stronger U.S. economy.
“Although there will be difficult adjustments for some industries and their workers, the effect of these measures on Canadian growth and inflation is expected to be modest,” the bank said in a statement.
But in addition to steel and aluminum tariffs, Canada is facing a significant trade-related unknown that many believe would inflict far more damage on the economy: U.S. duties on the automotive sector
U.S. tariffs on the auto sector’s integrated cross-border supply chains would have “large impacts on investment and employment,” the Bank of Canada warned Wednesday in its accompanying monetary policy report.
The bank, however, didn’t quantify the possible effects of auto tariffs on Wednesday. Governor Stephen Poloz has signalled in the past that he’s focused on data he can measure rather than the impacts of trade policies that have yet to materialize.
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