Bank of Canada Governor Tiff Macklem's Inflation Control Threatened by US-Canada Tariff War
Governor Macklem has successfully tamed inflation in Canada. However, a potential tariff war between the US and Canada poses a significant threat to this stability.
Despite six consecutive interest rate cuts aimed at bolstering economic growth, the Bank of Canada's recent decision may not fully account for the fallout from a trade dispute, which could escalate as early as this weekend.
In a hypothetical scenario, the US imposing 25% tariffs on all goods from Canada and Canada retaliating in kind would lower GDP growth and accelerate inflation in both economies. Macklem warns that "a long-lasting and broad-based trade conflict would badly hurt economic activity in Canada" and "put direct upward pressures on inflation."
In the US, consumers would face higher prices for imported goods, leading to inflation, though a stronger dollar would partially mitigate this. Exporters would experience lower demand, leading to reduced production, layoffs, and a weakened GDP.
For Canada, the conflict would harm exports and imports, particularly as the US is its largest trading partner. A weaker loonie and reduced net export volumes would also hurt the trade balance.
Despite potential government transfers from tariff revenues, the drag on inflation from weaker growth and falling commodity prices cannot fully offset the inflationary effects of a weaker dollar, rising input costs, and increased prices for US goods.
Excluding the tariff threat, the Bank of Canada forecasts GDP growth of 1.8% this year and next, but has revised down projections for 2025 and 2026 due to slower population growth caused by reduced immigration.
"With inflation back around the 2% target, we are better positioned to be a source of economic stability," said Macklem. He emphasizes the need to weigh the downward pressure on inflation from economic weakness against the upward pressure from supply chain disruptions and higher input costs.