The Bank of Canada will be holding its monetary policy meeting today on 11th July 2018. According to the economists polled, the Bank of Canada is expected to hike interest rates by 25 basis points to 1.50%. However, approaching the event the central bank decision to hike rates remains a close call.
The Governor of the Bank of Canada, Stephen Poloz, in his speech earlier last week said that the central bank would assess the impact of escalating trade tensions and the new mortgage rules when deciding on the interest rate decision.
According to Poloz’s comments, the Bank of Canada’s officials are said to be incorporating the projections of potential fallout from the steel and aluminum tariffs that were imposed by Canada. Canada also retaliated by imposing trade restrictions on certain goods from the United States.
The Trump administration had announced earlier in late May that it would impose punitive tariffs on its trading partners. The Bank of Canada had previously hiked interest rates in January this year by 25 basis points.
It was the third rate hike since May last year. The central bank had repeatedly stressed that the trade tension uncertainty would remain a factor in deciding on interest rates.
Most recently, the Bank of Canada took a hawkish turn after it announced that there was room for further rate hikes for the Canadian economy. The markets quickly reacted by raising the expectations for at least another rate hike for the remainder of the year, if not two.
The housing market is also another factor according to Poloz. In the run up this week’s monetary policy meeting, the central bank is said to focus on the household data as well. This comes as the new mortgage rules on lending come into play. The policy is also said to affect renewals of existing mortgages as well.
Speaking to the Greater Victoria Chamber of commerce, Poloz said that he expects the above issues to feature prominently when the central bank deliberates on interest rates this week.
Investors initially braced for a Bank of Canada rate hike in July. However, doubts remain on whether the BoC will hike rates or not. For now, the BoC Governor is expected to remain on the fence with a decision most likely to be taken during this week’s BoC meeting.
Amid the interest rate decision, Canada responded to the U.S. trade tariffs by noting that it would impose tariffs on imports of certain goods from the U.S. The reprisal came into effect from Sunday, July 1st. Despite the retaliation, the imposition of trade tariffs is expected hit both the United States and the Canadian economies.
Canada imposed tariffs of 25% on metal products and a 10% increase on tariffs on over 250 goods imported from the U.S. This included coffee and alcoholic beverages. The import duties are expected to target approximately $12.6 billion worth of goods from the U.S.
Canada’s foreign minister commented that “We will not escalate and we will not back down” highlighting the serious risks of protectionist trade policies. Canada, considered as the closest trading partner of the U.S. raised concerns about a full blown global trade war.
The deterioration of U.S. trading relationships with Canada and other key economies around the world has also raised concerns of a global trade war. There are no signs of slowing as the U.S. administration also ramped up its rhetoric by threatening to impose tariffs on automotive imports as well.
If the U.S. administration follows through, economists believe that it could seriously hamper the export market and bear greater consequences on the Canadian economy.