Retaliation against U.S. tariffs could force Bank of Canada to hike interest rates, economist says
Retaliation against United States tariffs could hold the key to Bank of Canada‘s moves on interest rates, says a prominent economist.
“U.S. tariffs with no retaliation would mean more easing by the (Bank of Canada); U.S. tariffs with material retaliation by Canada could thwart easing and possibly even bring back policy tightening,” Derek Holt, vice-president and head of capital markets economics at the Bank of Nova Scotia, said in a recent note. “And we’ll play scenarios in between when we learn more in the context of fluid, fast-moving developments.”
Donald Trump‘s inauguration as U.S. president is on Jan. 20, and he has pledged to impose 25 per cent tariffs across the board on day one. In preparation of him making good on that threat, Canada has come up with a list of $150-billion worth of U.S. products to put tariffs on, though the targets haven’t been released.
In November, Canada imported $31.8-billion worth of goods from the U.S., representing 53.4 per cent of the $59.5 billion in total imports from the country’s top 15 trading partners.
“It’s hard to have conviction on the path forward for the Bank of Canada because of this tariffs issue,” Holt said in an interview. “If we don’t get tariffs, then our baseline assumption is that maybe we get another quarter- or half-a-point worth of rate cuts.”
The Bank of Canada’s benchmark lending rate currently stands at 3.25 per cent, which is at the top of its neutral range of 2.25 per cent to 3.25 per cent.
“We’re at 3.25 now; maybe we go down three or 2.75, somewhere in that range, but we’re pretty close to where we think you would be balancing conditions and the overall economy,” Holt said.
If Trump’s tariffs land and Canada doesn’t retaliate, then Holt thinks the Bank of
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