Poloz Trumped by tariff threats

It seems quite likely that the audience that pitched up to the Greater Victoria Chamber of Commerce this Wednesday to hear Bank of Canada Governor Stephen Poloz were taken aback by his formal remarks.  Instead of the usual tour d'horizon of the economic situation, Poloz spoke about how he and his colleagues at the Bank are trying to increase transparency, for the benefit of financial market participants and the public at large. Poloz wants the Bank's activities to be understood by people without an economics degree.  This puts him in a very different camp from many other central bankers:  Alan Greenspan, for example, actually seemed to be offended when his audiences picked up on his meaning too easily.

Towards the end of the speech, Governor Poloz made some general comments about the particular difficulties the Bank is facing in setting policy in the current environment, and it is these comments that have received the most attention from the media.  After explaining why the Bank no longer offers as much "forward guidance" as it used to, he stated that

There is always a degree of uncertainty when using economic models, but these days there is a litany of things we simply do not know. These include the degree to which uncertainty about trade policy is holding back business investment, how new guidelines for mortgage lending are affecting the housing market, and how sensitive the economy is to higher interest rates given the accumulation of household debt.

And then

This is why we say that the Bank is particularly data-dependent right now. 

Given signs of weakness in the recent data flow,  these comments have caused market participants to scale back their expectations for a rate hike in July.  The latest monthly data showed that the gradual upward trend in CPI has stalled, while retail sales unexpectedly declined,  April GDP data, due for release this Friday, are expected to be weak.

Overshadowing everything is the threat of an escalating tariff war with the United States.  Canada's retaliatory tariffs against Trump's steel and aluminum levies are set to kick in on July 1, and it would be entirely in keeping with Trump's character if he responded with a fresh set of tariffs of his own.  He has already threatened tariffs on imported cars, and economists are starting to quantify what the impact of such a move might be.  One study suggests 165,000 Canadian jobs could be put at risk, the vast majority of them in Ontario.  Linda Hasenfratz, CEO of Linamar Machine, Canada's second-largest car parts maker, says such tariffs would be "the final step to economic disaster".

For now, markets are still seeing more than a 50 percent chance of a rate hike next month, but given the speed with which things are developing on the trade front, those odds could well change by the time the Bank announces its decision on July 11.