The Bank of Canada expectedly increased their key interest rate by 25bps to 1.50%, marking the fourth rate hike in the last 12-months, which resulted in the Canadian dollar climbing on the news. "Business investment is growing in response to solid demand growth and capacity pressures, although trade tensions are weighing on investment in some sectors", said the BOC.
"We have also incorporated the effects of the USA tariffs on steel and aluminum, and the various countermeasures implemented around the world".
"Governor Poloz did note the risk of a far greater shock to the economy should we see more tariffs (autos in particular) but suggested that they "can't make policy based on hypotheticals".
The bank raised the rate even as it predicts larger impacts from the widening trade uncertainty, particularly after the United States imposed steel and aluminum tariffs on Canada and Ottawa's retaliatory measures.
The bank's relatively sanguine view of the trade risk boosted the Canadian dollar to its strongest in almost four weeks, and economists said they expected the central bank to hike again by year end.
"At a quarter point it's not going to change a lot right now, but the Bank of Canada does anticipate to have to continue to raise rates in the future to keep inflation in check, so that's something to be mindful of", said Philip Herner, financial advisor with Assante Capital Management Ltd.
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"Although there will be hard adjustments for some industries and their workers, the effect of these measures on Canadian growth and inflation is expected to be modest", the bank said in a statement.
Along the way, the bank will have to keep close watch on another trade-related unknown that many believe would inflict far more damage on the economy: USA duties on the automotive sector.
Poloz recently said the impacts of the U.S. He added that the unknowns around trade could also include positive developments such as the successful renegotiation of the North American Free Trade Agreement over the coming months.
Outside the country, the Bank of Canada has its eye on how widening global trade disputes, including an intensifying battle between the USA and China, will affect the world's economy. It warns that "escalating trade tensions pose considerable risks to the outlook" at the global level. "Temporary factors are causing volatility in quarterly growth rates: the bank projects a pick-up to 2.8% in the second quarter and a moderation to 1.5% in the third".
The Bank expects the global economy to grow by about 3 ¾ per cent in 2018 and 3 ½ per cent in 2019, in line with the April Monetary Policy Report (MPR). Household spending is being dampened by higher interest rates and tighter mortgage lending guidelines.