Key Takeaways
- The Bank of Canada Governor, Tiff Macklem, sees 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 risks, including U.S. President Donald Trump’s threats toward Canada and other countries.
- Macklem believes that there are more factors that could deter Canada from achieving the bank’s economic forecasts, making the forecast more vulnerable.
- The Bank of Canada is keeping its interest rate on hold, but economists interpret Macklem’s comments as tilted toward the need for stimulating growth.
- The Federal Reserve’s independence is under attack, and Macklem has spoken to Fed Chair Jerome Powell in support of the Fed’s stability.
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. These factors include U.S. President Donald Trump’s threats toward Greenland, his removal of Venezuela’s leader, and repeated threats to impose more tariffs on Canada. Macklem believes that these risks make the Bank of Canada’s economic forecasts more vulnerable to disruption.
Economic Forecasts and Risks
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 emphasized that these forecasts are subject to risks, including Trump’s tariff threats and the review of the United States-Mexico-Canada free trade deal. 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. Despite this, money markets are pricing in no cuts through 2026, but investors see a higher chance of a hike in the last quarter.
Interest Rate Decisions
When asked about the balance of risks, Macklem cited uncertainty, stating that it is difficult to assign probabilities to the risks. He emphasized that 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. Macklem also noted that the Federal Reserve’s independence is under attack, which could have implications for the U.S. economy and, in turn, the Canadian economy. He has privately spoken with Fed Chair Jerome Powell, expressing support for the Fed’s stability and predictability.
Support for the Federal Reserve
Macklem has spoken out in support of the Federal Reserve’s independence, stating that a stable and predictable Fed is good for the U.S. economy and the Canadian economy. He noted 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. Macklem believes that the unpredictability of U.S. policy has dented the U.S. dollar as the global safe asset, and there are not many great alternatives. The chiefs of many of the world’s major central banks, including Canada’s, issued a joint statement in support of Powell after Trump’s administration threatened him with a criminal indictment.
Conclusion and Economic Resilience
Despite the risks and uncertainties, the Canadian economy is showing resilience overall. The Bank of Canada has kept its interest rate on hold, and Macklem has emphasized the need for caution in the face of elevated geopolitical risks and U.S. trade policy. The bank’s economic forecasts are vulnerable to risks, but Macklem believes that the Canadian economy has the potential to withstand these shocks. However, the bank will continue to monitor the situation closely and adjust its policies as necessary to support the economy. In the meantime, investors and economists will be watching the situation closely, waiting to see how the Bank of Canada will respond to the evolving economic landscape.
