Politicians see a revision coming
Canada-United States-Mexico Agreement (CUSMA)
as a “significant risk” to their prospects, according to a summary of the board's latest deliberations released Tuesday.
“On trade policy, members agreed that the upcoming revision of (CUSMA) poses a significant risk,” the document said. “Uncertainty before and during negotiations is likely to put pressure on business investment.”
The discussions came ahead of the central bank's decision to keep interest rates at 2.25 percent on December 10.
Policymakers debated the outcome of the CUSMA negotiations along two tracks: a worst-case scenario involving the dissolution of CUSMA and higher tariffs, or a resolution to the CUSMA negotiations that would provide some stability to North American trade policy.
In making his latest rate decision this year, Bank of Canada Governor Tiff Macklem said the overnight rate was “about the right level” to contain inflation and support the economy through the structural adjustment forced by the trade war with the United States, although uncertainty remains high.
The members of the governing council discussed their next step, but
“Given the high level of uncertainty, members agreed that while the current policy rate is approximately at the right level for the current situation, it is difficult to predict when and in what direction the next policy rate change will occur,” the minutes said.
Many economists expect the Bank of Canada to keep rates steady until 2026.
Members also discussed that the Canadian economy is showing greater resilience than initially expected under the U.S. tariffs. The economy grew 2.6 percent in the third quarter, beating the central bank's forecast of 0.5 percent. Statistics Canada has also revised GDP figures upward for 2022, 2023 and 2024.
Policymakers are also expecting a revision to third-quarter data given the lack of U.S. trade data due to the U.S. government shutdown.
“Members agreed that information received since the last decision had affected the short-term dynamics of GDP growth, but did not change their view that GDP will grow at a moderate pace in 2026 and inflation will remain close to the two percent target,” the discussion said.
The labor market showed strength in the fall, with the unemployment rate falling to 6.5 percent in November. However, the bank's board of governors noted that most of those jobs were part-time, with job openings remaining low and hiring intentions low.
“Overall, members agreed that the Canadian economy is showing signs of resilience after a year of trade turmoil, but uncertainty remains high,” the summary said. “They will remain cautious in interpreting incoming data given recent volatility, and will be prepared to react if their forecasts change significantly.”
Policymakers expect inflation to rise slightly in the new year due to the temporary HST/GST holiday a year ago.
“Despite near-term volatility, the governing board continued to expect weak demand and continued economic lull to roughly offset price pressures associated with trade reconfiguration, keeping CPI inflation close to the two percent target,” the minutes said. “Core inflation indicators are expected to gradually decline in the coming months.”
Members of the governing council agreed that if a major shock were to occur that would impact inflation and growth prospects, they would be prepared to respond.
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