OTTAWA—The Bank of Canada held its overnight rate target unchanged at 0.50 percent on Wednesday, Jan. 18 in the context of a largely unchanged economic outlook. The economy is projected to return to full capacity around mid-2018 mainly due to a boost from the federal government’s infrastructure program, which has yet to make an economic impact.
Of course, the big change since the BoC last published its quarterly projections is the U.S. election. “Most importantly, what we have is heightened uncertainty,” said Bank of Canada Governor Stephen Poloz in his press conference referring to the Trump administration’s fiscal and, especially, trade policies.
In its latest Monetary Policy Report (MPR), the Bank factored in a cut in U.S. personal and corporate income taxes, which boosts U.S. gross domestic product (GDP) almost 0.5 percent by the end of 2018 to 2.3 percent.
However, the Bank judged it difficult to pin down a reasonable base-case assumption on trade policies. “We cannot capture these in our projections because they are simply unknown at this point,” Poloz said. Potential protectionist trade policy would have “material consequences for Canadian investment and exports,” according to the MPR.
“International trade is a positive sum game, not a zero sum game,” Poloz said about the presumption economists carry. “By trading, you generate more income on both sides of the exchange. That’s what trade does.”
