Trade uncertainty ‘a little more risky’ now: Bank of Canada

By Leah Schnurr and Andrea Hopkins

OTTAWA (Reuters) – Trade uncertainty feels more risky than it did in April, the head of the Bank of Canada said on Thursday, noting the impact of recent U.S. tariffs on aluminum and steel imports will be incorporated into updated economic forecasts next month.

The comments from Governor Stephen Poloz came after the central bank said the vulnerabilities created by Canada’s housing market and huge household debt have eased amid rising incomes, higher interest rates and tighter mortgage rules.

In a report that continued the upbeat tone set last week when the central bank signaled more rate hikes were coming, the bank said slowing credit growth among households and higher incomes have eased vulnerabilities since its November report, but they remain elevated and will persist for some time.

The central bank has raised rates three times since July 2017 and expectations of a hike next month have risen.

Poloz told a news conference that unknown trade policy was the biggest risk in the context of setting monetary policy.

“In the (Monetary Policy Report) of April (trade) was the top risk and nothing has happened since then to make it less important or less risky. On the contrary, it feels even a little more risky today,” Poloz told reporters.

Since April, the United States has moved ahead with tariffs on steel and aluminum imports from countries including Canada, while momentum to negotiate an updated North American Free Trade Agreement has stalled.

Poloz said while the impact of the tariffs will be addressed in the bank’s projections in July, consumers will end up paying more for many things, which will impact inflation.

“Reducing trade is a negative sum game. Everybody loses, in some way or another,” he said.

While the bank said it was encouraged by the easing of the two main financial system vulnerabilities around debt and housing, the closely watched Financial System Review report noted “some evidence of speculative activity” in condominiums in Toronto and Vancouver.

The condo markets in Canada’s two most expensive housing markets have remained strong even as the detached market has swooned following higher borrowing costs and tighter mortgage rules.

It said speculation may be supporting condo resales as investors bet that price gains will continue, and noted the risk that speculators may quickly sell their assets if prices fall.

Still, the bank said it expects the housing market to stabilize, with strong labor markets supporting fundamentals.

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