The Bank of Canada said on Tuesday that if U.S. President-elect Donald Trump follows through on his threat of tariffs on Canada, it would have an impact on both economies and the central bank would incorporate those into its economic forecasts.
Trump announced on Monday that he would impose a unilateral 25% tariff on all goods from Canada and Mexico from Jan. 20.
If Trump carries out his threat, economists say it could fuel inflation, suppress growth and distort the trajectory of interest rates in Canada.
"What happens in the U.S. has a big impact on us, and something like this would clearly have an impact on both economies," deputy governor Rhys Mendes said during a audience question and answer session in Charlottetown, Prince Edward Island.
Mendes, who was at the venue to talk about the BoC's inflation target and its impact on monetary policy, was responding to a question about the impact of Trump's proposed tariffs.
"At this stage, we'll be watching, and once we actually see the specifics of the policies that are enacted, we will start to incorporate those into our outlook," he said.
The bank will update its economic forecasts on Jan. 29 when it announces its first monetary policy decision of the year.
During his speech earlier in the day, Mendes said inflation should fade into the background again as the annual rate settled back at 2%.
That should allow consumers and businesses to spend and invest with confidence after years of difficulties, he said.
The BoC has reduced its key rate four times in a row since June and inflation - which spiked at 8.1% in June 2022 - has consistently stayed within the 1% to 3% target range this year.
"The past few years were unlike anything we'd experienced before, and none of it was easy. But we believe inflation will once again fade into the background as it settles back at 2%," Mendes said.
"This will allow Canadian consumers and businesses to spend and invest with confidence."
The BoC cut rates in October by a super-sized 50 basis points to 3.75% and Mendes reiterated that further reductions were likely if the economy developed as forecast.
"We no longer need interest rates to be as restrictive as they were. This is why we took a bigger step at our last decision," he said.
Inflation in October ticked back to up to 2% from 1.6% in September and currency markets see a less than one in five chance of another 50 basis point rate on Dec. 11.
Mendes said the bank would not want to see inflation falling below the 2% mark and poured cold water on the idea of measures to reverse the price increases of recent years, given they would lower inflation expectations, hurt demand, prompt lay offs and depress wages.
"Escaping a deflationary cycle of this nature can be extremely difficult," he said.
