Key Takeaways:
- The Bank of Canada Governor, Tiff Macklem, believes that there is unusual potential for a new shock to the economy due to elevated geopolitical risks and U.S. trade policy.
- The Bank of Canada’s economic forecasts are vulnerable to potential shocks, including U.S. President Donald Trump’s threats toward Canada and other countries.
- Macklem has spoken to Federal Reserve Chair Jerome Powell and expressed support for the Fed’s independence.
- The Bank of Canada is keeping its interest rate on hold, but economists predict a potential cut to stimulate the economy.
- The outcome of the re-negotiation of the United States-Mexico-Canada Agreement (CUSMA) may impact future interest rate changes.
Introduction to Geopolitical Risks
The Bank of Canada Governor, Tiff Macklem, has expressed concerns about the potential for a new shock to the economy due to elevated geopolitical risks and U.S. trade policy. In an interview with Reuters, Macklem stated that there are more factors than usual that could deter Canada from achieving the bank’s economic forecasts. He cited U.S. President Donald Trump’s threats toward Greenland, his removal of Venezuela’s leader, and repeated threats to impose more tariffs on Canada as examples of these risks. Macklem also mentioned that the world is concerned about the safety of U.S. assets, and that foreign investors want exposure to U.S. equities but hedge against the currency risk, which pulls the value of the dollar down.
Economic Forecasts and Vulnerabilities
The Bank of Canada released new projections for the economy and inflation in its monetary policy report, which showed modest growth in 2026 and 2027. However, Macklem believes that these forecasts are vulnerable to potential shocks, and that there are more risks that could cause them to go wrong. He cited Trump’s threat to impose a 100% tariff on Canada if it follows through on a trade deal with China as an example of such a shock. Economists have interpreted Macklem’s comments as tilted toward the need for stimulating growth, predicting that the tone has become more inclined toward a cut to stimulate the economy.
Interest Rate Changes and Uncertainty
When asked whether he thinks risks are more tilted toward a cut or a hike later in the year, Macklem cited uncertainty. He stated that in order to comment on the balance, one needs to be able to assign probabilities to the risks, and that he finds it difficult to do so. The latest tariff threat from the White House and the review of the United States-Mexico-Canada free trade deal pose obvious risks to the bank’s outlook, besides all the other uncertainties. Money markets are pricing in no cuts through 2026, but investors see a higher chance of a hike in the last quarter.
Support for the Federal Reserve
Macklem has privately spoken with Federal Reserve Chair Jerome Powell and expressed support for the Fed’s independence. He stated that a Federal Reserve that is providing stability to the U.S. economy is good for the U.S. economy and the Canadian economy. Macklem also said that a Federal Reserve that is not delivering predictability isn’t going to be good for anybody. The chiefs of many of the world’s major central banks, including Canada’s, issued a joint statement in support of Powell this month after Trump’s administration threatened him with a criminal indictment.
Impact of CUSMA Re-Negotiation
The outcome of the re-negotiation of the United States-Mexico-Canada Agreement (CUSMA) may impact future interest rate changes. The Bank of Canada is keeping its interest rate on hold, but economists predict a potential cut to stimulate the economy. The re-negotiation of CUSMA poses risks to the bank’s outlook, and the outcome may affect the bank’s decision on interest rate changes. Macklem’s comments suggest that the bank is closely monitoring the situation and is prepared to take action if necessary.
Conclusion and Future Outlook
In conclusion, the Bank of Canada Governor, Tiff Macklem, has expressed concerns about the potential for a new shock to the economy due to elevated geopolitical risks and U.S. trade policy. The bank’s economic forecasts are vulnerable to potential shocks, and the outcome of the re-negotiation of CUSMA may impact future interest rate changes. The bank is keeping its interest rate on hold, but economists predict a potential cut to stimulate the economy. As the situation continues to evolve, it is likely that the bank will closely monitor the situation and take action if necessary to ensure the stability of the economy.
