Bank of Canada shifts from forecasts to flexibility as US tariffs and inflation risks mount
Bank of Canada Governor Tiff Macklem said ongoing trade tensions with the United States are forcing policymakers to be “less forward-looking” than usual when making monetary policy decisions.
According to Macklem’s remarks delivered Thursday at Calgary Economic Development and reported by Financial Post, trade uncertainty is directly shaping the central bank’s approach.
“If we were to guess where the economy is heading and make policy to optimize that outcome, we’d risk getting it wrong,” Macklem said. “So, we need to set policy that minimizes risk. That means being less forward-looking than normal until the situation is clearer.”
The ongoing trade dispute has led to the United States imposing broad tariffs on Canadian goods, including a 25 percent levy on imports.
According to The Times, this move is expected to lower US growth and raise inflation, with Canada's economy projected to face a 2.6 percent GDP hit.
Macklem highlighted that such uncertainty is already affecting both sides of the border, noting declines in consumer confidence and stock market indices.
He explained that the Bank of Canada typically bases policy decisions on forecasts about the future economy.
However, the unpredictable developments with Canada’s largest trading partner are changing that strategy.
“And it may mean acting quickly when things crystalize,” he said. “We need to be flexible and adaptable.”
He noted that the uncertainty is already impacting both countries. Consumer confidence has fallen in Canada and the US, while US stock market indices have dropped from recent highs.
During the speech, Macklem presented three inflation scenarios linked to the cost effects of broad tariffs. The central bank remains focused on how these tariffs could pass through to prices.
In a one-year pass-through scenario, year-over-year inflation could peak 2.27 percentage points higher than normal by the first quarter of 2026.
Macklem also pointed to industries most exposed to US tariffs.
He said that a long-term 10 percent tariff on Canadian energy would hurt profitability, decrease investment, and potentially affect employment.
While the energy sector has weathered boom-and-bust cycles, Macklem stated, “a threat to the Canada-US energy relationship is not something we’ve ever had to contemplate.”
He also noted concerns in agriculture. With planting season approaching, uncertainty remains over whether tariff exemptions for fertilizers will continue. China’s announcement of a 100 percent tariff on Canadian canola adds to the strain.
“It’s a very difficult situation so close to planting season and adds to the uncertainty Canadian farmers are already facing,” Macklem said.
Steel and aluminum tariffs are still in effect, and Macklem said these are expected to bring particular disruptions to Quebec and Ontario.
The Bank of Canada reduced its policy rate for the seventh time last week, lowering the overnight rate to 2.75 percent. Macklem attributed the decision in part to the trade uncertainty with the US.
According to The Wall Street Journal, Macklem acknowledged that while the Canadian economy ended 2024 on a positive note, it now faces a “new crisis” due to the trade war.
Despite a strong end to 2024 for the Canadian economy, the trade dispute puts future growth at risk. The central bank previously projected a three percent drop in GDP over the next two years.
“The Canadian economy managed a soft landing,” Macklem said. “Unfortunately, we’re not going to stay on the tarmac for long.”
