–BOC Widely Expected to Keep Policy Rate at 2.75% Wednesday After 7 Rate Cuts Totaling 225 Basis Points from June 2024 Until March 2025
–Focus is on Whether Bank will Continue to ‘Proceed Carefully’ and Remain ‘Less Forward-Looking Than Usual’
By Max Sato
The focus is on whether Governor Tiff Macklem will repeat his June 4 remarks that Governing Council will continue to “proceed carefully” and remain “less forward-looking than usual,” and whether he sees the Trump tariff overcast over the Canadian economy clearing up at all.
Despite what Japanese leaders call a “mutually beneficial” trade accord with the Trump administration last week, which set the tone for the European Union’s own agreement with Washinton within days, it is likely to take some time before Ottawa reaches any trade deal with Washinton because a 15% across-the-board tariff on U.S. imports, although lower than much higher numbers quoted by President Trump at one point, is not attractive to Canada.
For one thing, Europe has agreed to buy energy from the United States while Americans need Canadian energy. Canada and the U.S. also have closely interlocked production and distribution networks for the auto and other industries.
In addition, Trump’s “fentanyl emergency” tariffs, currently set at 25%, are applied only to goods that do not comply with the rules of origin in the Canada-U.S.-Mexico Agreement. This means most Canadian exports to the U.S. are currently crossing the border tariff-free.
Tokyo and Washington have agreed to lower the “reciprocal” tariff rate to 15% on most U.S. imports of Japanese goods including automobiles and auto parts (50% on iron and steel), down from President Trump’s original plan to slap 25% duties on Japan, but the figure is still much higher than the 2.5% rate imposed by the United States before the second Trump administration.
The two allies have also agreed to work closely together to build strong supply chains in the United States for critical sectors including semiconductors, drugs, steel, shipbuilding, key minerals, air transport, energy, automobiles and artificial intelligence. In the trade deal on building “mutually beneficial” supply chains,
Tokyo will spend up to $550 billion by making investments and extending loans from Japan Bank for International Cooperation and providing underwriting by Nippon Export and Investment Insurance. It is a tentative agreement, however, and both sides seem to have different views on whether any private-sector investment will be included.
In the wake of this bilateral trade deal, the 15% tariff rate has become a new normal, for better for worse, and has somewhat calmed jitters among investors around the world. The European Union has settled with 15% duties on most of its exports to the United States, along with a commitment by Europe to invest $600 billion in the U.S. economy and spend $750 billion on U.S. energy products.
Bank of Canada officials have been monitoring both the downward pressure on inflation coming from weaker economy and the upward pressure arising from higher costs, Macklem said. “We will have to factor all of that in July,” he told a post-meeting news conference on June 4.
Last month the panel of seven policymakers at the bank reached a “clear consensus” over holding rates (they don’t vote) but they were also divided over whether the bank should continue cutting rates to shield the economy from the impact of trade rows between Washington and its key allies.
At the time, the governor said, “On balance, members thought there could be a need for a reduction in the policy rate if the economy weakens in the face of continued U.S. tariffs and uncertainty, and cost pressures on inflation are contained.”
Macklem offered no specific CPI numbers or conditions that could prompt the rate-setting board to consider a rate cut when asked what he meant by cost pressures being “contained.” He said this paragraph from his statement should not be interpreted as forward guidance but that it was part of the deliberations by Governing Council members.
“The only forward guidance we can give you is … given the unusual level of uncertainty, we are proceeding carefully and that means we are being less forward looking than usual,” said the governor.
In the latest Canadian inflation data released on July 15, the year-on-year increase in the total CPI edged up to 1.9% in June after being unchanged at 1.7% in May. The annual CPI rate eased to a seven-month low of 1.7% in April from 2.3% in March, thanks to the removal of the consumer carbon tax on April 1 and a sharp drop in global crude oil prices.
What is concerning BOC officials is that their two main measures of core inflation are stuck well above the bank’s 2% inflation target — at or just above the top end of its 1% to 3% control range. The CPI trim stood at 3.0% in June and May after sliding only slightly from 3.1% in April while the CPI median picked up to 3.1% in June from 3.0% in May after surging to 3.2% in April from March’s 2.8%.
The June CPI data “gives the Bank of Canada almost nothing to justify a rate cut in July,” BMO Capital Markets Chief Economist Doughlas Porter said. “If the solid employment report was the icing on the cake for that decision, this is the cherry on top.”
“Simply put, underlying inflation remains stubbornly strong. We’ll need to see a material deceleration in core for a cut in even the September meeting to be in play, barring a steep deterioration in the economy (which can’t be ruled out with the ongoing tariff uncertainty),” he wrote in a report.
The Canadian economy created 83,100 jobs in June, well above the consensus call of just 8,000, although most of the gains were in part-time jobs. The unemployment rate unexpectedly slipped to 6.9% from 7.0% in May.
The bank stood pat in April and June amid extremely high uncertainty at the initial phase of trade war storm. That followed moderate 25-basis point rate cuts, in March and January, two consecutive 50-basis point slashes, in December and October, and three 25-basis point cuts since June when the bank began unwinding the effects of its past aggressive tightening.