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Although the Governor of the Bank of Canada TIFF Macklem is on it that there is a limit to a response to a monetary policy on a tariff war, he has a clear picture of the damage it could benefit from the Canadian economy.
“Increased trade friction with the US is a new reality,” he said on Friday in a speech in the Toronto area. Although the timing, degree and duration of rates are uncertain, the governor said it seems inescapable that “a structural change is for us.”
Macklem imposed a chain reaction in the event that the US would impose 10% rates on energy products and 25% levies on everything else that the country buys from Canada, which would also be reflected in retaliation measures on certain products.
Everything in, a rate war in the US and Canada would fall by almost 3% in two years in the Canadian output and “growing away growth” in that period, Macklem said. Although the economy can again expand after the initial shock, the path for the long -term growth would be 2.5% lower than a scenario where there were no rates.
Now raised Canadian goods in the US, the demand for those products would tumble. The bank sees export falling by 8.5% in the year after the rates come into force, and exporters who reduce production and dismiss employees.
“The shock would be felt in Canada” because export to the American account about a quarter of national income, he said.
Lower export income would reduce family income, and retaliation rates would temporarily increase consumer prices above the target of 2%, both of which would deter consumer expenditure. The bank expects the consumption to fall by more than 2% in mid -2027.
The depreciation of the Canadian dollar would increase the prices of imported goods and services, and integrated supply chains between two countries can add costs in multiple production stages.
With export and weakening of the consumer, companies would lower their investment expenditure. Higher costs and lower profit margins would suppress those expenses even more. The bank predicts the investments by almost 12% by 2026.
Macklem repeated that the bank is now “better positioned to contribute to economic stability” with inflation now back at Target, and warned that there is a limit to a monetary policy reaction.
