March 8, 2018 / 8:52 PM / a year ago

UPDATE 3-US tariffs risk serious consequences, no 'all clear' yet -Bank of Canada

(Adds Lane comment from news conference)

By Leah Schnurr

VANCOUVER, March 8 (Reuters) - U.S. plans for steel and aluminum tariffs and rising protectionist rhetoric carry potentially serious consequences and it is too soon to call the “all clear” even with a temporary exemption for Canada, a Bank of Canada official said on Thursday.

Reacting to news that U.S. President Donald Trump will push ahead with tariffs on steel and aluminum imports but exempt Canada and Mexico, Bank of Canada Deputy Governor Tim Lane said the trade uncertainty has a dampening effect on the central bank’s outlook, adding that the details of the tariffs remained fluid.

“I would say we’re not in a situation of calling all-clear. I would say there’s still a significant degree of uncertainty around the future trade regime,” Lane told reporters in Vancouver after a speech highlighting the chilling effect of trade uncertainty.

Lane also reiterated that the central bank is not on a pre-set course when it comes to raising interest rates, saying the bank will view future rate moves cautiously and assess incoming data.

The speech, a day after the bank held rates, reinforced a dovish message, and financial markets had little reaction, overshadowed by the U.S. tariff announcement.

While the Canadian economy was progressing much as policymakers thought it would, it was appropriate that interest rates remain below neutral, Lane said in his speech.

“Lane reinforced the cautious tilt in stating that easy policy is still needed to offset current challenges, meaning that some accommodation is necessary to keep the economy on track,” CIBC Economics economist Royce Mendes wrote in a note to clients.

Having raised rates three times since July, the bank was now assessing four key issues, Lane said - whether rising labor force participation and investment could create more capacity; whether inflation dynamics could be changing in the new economy; why wage growth has been slower than expected; and how high household debt could change the impact of rate hikes.

In moving gradually, the bank is trying to balance the risk of undermining economic growth by moving too quickly with the risk of waiting too long and needing to hike rates sharply to rein in inflation, Lane said.

He said accommodative monetary policy was working to offset several factors weighing on demand, including “persistent competitiveness challenges facing Canadian exports, the chilling effect of heightened uncertainty about future U.S. trade policies, and the burden of high household debt levels.” (Additional reporting by Andrea Hopkins and David Ljunggren in Ottawa; Editing by Peter Cooney and James Dalgleish)

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