Thursday March 20, 2025 | CALGARY, AB [Reporting from VICTORIA, BC]
Socioeconomic analysis by Mary P Brooke | Island Social Trends
The Bank of Canada will need to be less forward-looking and more flexible and adaptable under the relatively new and pressing conditions of the tariff war that was started by the United States.
That was the overall framework for the Bank of Canada as covered in detail this morning by Bank of Canada Governor Tiff Macklem.
He addressed a lunch meeting of Calgary Economic Development, after which he took audience questions through the moderator and then held a long press conference. Following this, Macklem heads into two days of local roundtable meetings.
Macklem seemed pleased at having guided the Canadian economy to a ‘soft landing’ coming through the post-pandemic period with a strengthened economy but says “we’re not going to be on the tarmac for very long”.
He was referring of course to the impact of tariffs that are being applied (or not) in an irregular, uncertain and unpredictable way.
Meanwhile, “the Canadian economy is coming into this in a good situation,” said Macklem.
“We’e been through a lot in the last five years. “This is going to be difficult but we feel we are well positioned. Tailwinds have changed into headwinds. A trade war is in nobody’s interest,” the Bank of Canada Governor said.
The next interest rate announcement comes in less than a month from now, on April 16. That will be followed by interest rate announcements on June 4, July 30, September 17, October 29 and December 10.
Tariff impacts:
The tariff scenario that Canada now faces will bring a weaker economy and higher inflation as well as downward pressure on inflation. A weaker exchange rate will put upward pressure on inflation, Macklem explained.
The economic impact could be severe,” said Macklem. “The uncertainty is already causing harm. The uncertainty we face is going to be here for a while.”
He did add that the “most disturbing” thing for Canada is about the 51st state jabs coming from the US president. “There can be no question about our sovereignty or our border,” said Macklem in what might be seen as an uncharacteristic remark outside the usual bounds of the monetary domain.
But these are different times, in many ways. Something that Macklem said in various ways today.
Part of dealng with ‘different times’ will include the Bank reaching out to more Canadian households and businesses to understand how they are reacting to the uncertainty and escalating trade conflict.
Trade war realities:
Tariffs will impact various sectors and regions differently. The on/off tariff announcements and the threats of more to come are causing uncertainty.
“Canadian businesses and households are doing their best while the bank is navigating monetary policy,” Macklem outlined.
Monetary policy “cannot solve a trade war”, said Macklem. “But we can make sure we don’t add to it.” He said that Canadians are already worried about trade uncertainty and he hopes they won’t have to worry about inflation as well.
In stating the obvious, Macklem said that there are “far too many unknowns to predict what happens next”.
“A few key sectors will be hurt, regional economies will be impacted.”
This threat from the US is “creating a Canadian moment”, as seen in people ‘buying Canadian’. “People are looking at their own behaviour. That’s going to help us,” said Macklem.
Strategies:
Canadian businesses will need to figure out strategies and Canadian families will need to plan for the future, Macklem outlined.
For the Bank to understand how the consumer level is coping and responding is new territory but it shows the extent to which this economic crisis is expected to impact households and communities across Canada.
He points out that the Canadian economy started the year “in good shape”, including that interest rates had come down substantially. “Because of that we are better positioned to withstand impacts.”
Price stability over time:
Everyone across the economy is going to have to be flexible and adaptable, including the Bank of Canada.
Depending on conditions at the time, the next Bank of Canada policy interest rate announcement (coming April 16) may still continue on a downward trend regardless of where inflation is at. Maintaining business and consumer confidence is key.
Government policy:
“When governments announce changes in policy we take those on board and build those into our forecasts,” said Macklem.
Of course, there is now a new Liberal leader in Mark Carney (himself a former central banker) who is already showing how he will bring an economic development approach to governing this country. The next federal election is right around the corner (expected to be announced this Sunday, March 23).
Interprovincial trade:
Interprovincial trade has been looked at for a while in Canada, Macklem pointed out, but has been “getting a lot more attention recently”.
“Perhaps this is the opportunity to get them done,” he said, referring to all the needed regulatory changes.
That means more east-west transfer of goods across Canada (as well as beyond to Europe and the Pacific Rim countries), instead of north-south from Canada to the United States.
There are “too many small differences in regulations across the country” as well as a range of accreditations for different professions. Macklem hopes these can be “cut through” and resolved for trade across Canada.
“Even if we do this it will take time to have impact. People have been looking at this for some time,” said Macklem.
“Economic security is going to have to factor into trade relationships,” he said during the media portion of his time in Calgary today.
Structural change:
The impact of tariffs looks like it may be causing “structural change” to the economy. Prices will rise but hopefully can be contained at that higher level and not cause rapid inflation.
“We’re not going to let a tariff problem become an inflation problem,” said Macklem.
“This looks like a structural change. Le’s hope this can get to a more rational negotiation and a good trade relationship. But there’s a certain level of trust here that has been broken (between Canada and the United States) — that looks like structural change,” said Macklem today.
“We’ll be on a lower path, earn and consume less,” said Macklem, adding that the only way to offset that is with positive structural adjustments to the economy.
Some prices will go up. Those one-time price increases don’t become generalized inflation, he explained. Weakness in economy will dampen the impact of those pressures.
This is a very complicated kind of shock for the economy. For Macklem, a dreaded word is stagnation.
He is hoping to see more productivity growth. There was a boost of productivity in the 1970s but productivity has been weak since 2000, he stated frankly.
“Productivity growth is a wonderful thing,” said Macklem, outlining that it makes business more competitive and profitable and increases market share. Productivity produces higher wages.
Canada needs to become more “investable” by removing international trade barriers and streamlining the regulatory approval process to make it more predictable.
===== RELATED:
- Bank of Canada drops interest rate to 2.75% (March 12, 2025)
- Businesses & consumers need significant interest rate drop March 12 (March 10, 2025)
- NEWS SECTIONS: BANK OF CANADA | TARIFFS & TRADE