Bank of Canada Governor Tiff Macklem said Donald Trump’s trade threats make the world a more uncertain place, urging developed countries to work together to strengthen economic security.
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(Bloomberg) — Bank of Canada Governor Tiff Macklem said Donald Trump’s trade threats make the world a more uncertain place, urging developed countries to work together to boost economic security.
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In an end-of-year speech in Vancouver, Macklem said rising sovereign debt, rising long-term interest rates and slowing growth “make the world more vulnerable,” and that geopolitical tensions, wars and rising protectionism are adding to the risks.
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“The G7 democracies will be stronger if we confront issues of shared economic security together,” he said in prepared remarks. Canada is scheduled to host the G7 summit in 2025, which Macklem described as a “leadership opportunity.”
Last week, the central bank cut interest rates by 50 basis points for the second meeting in a row, bringing the benchmark overnight interest rate to 3.25%. In a speech Monday, Macklem reiterated that officials “expect a more gradual approach to monetary policy if the economy develops broadly as expected.”
Macklem said average inflation is expected to approach the 2% target over the next two years, and reiterated that monetary policy “no longer needs to be clearly in constrained territory.” However, he noted that there are domestic risks around inflation expectations, and reiterated that policymakers are “equally concerned about inflation being higher or lower than expected.”
High wage increases, combined with weak productivity, could increase price pressures, or below-potential economic growth could lead to lower inflation.
Macklem said there is an increasing focus on “negative international repercussions,” where one country’s actions harm other countries. But there is also positive cooperation, including when major central banks acted to rein in global inflation pressures after the pandemic, helping to reduce demand for global goods and take pressure off struggling supply chains.
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Regarding Trump’s threat to impose 25% tariffs on goods imported by the United States from Canada, Macklem said, “No one knows how the matter will develop in the coming months” and the future “seems more uncertain than it did before the pandemic.”
“Trade protectionism and economic fragmentation are on the rise, and the appetite for global cooperation is waning. Changing international relations are increasing uncertainty and costs and changing investment plans,” Macklem said.
In his wide-ranging speech, Macklem also said the bank has almost finished reviewing the tools it used during the pandemic, including quantitative easing and what he calls “extraordinary forward guidance” — Macklem’s 2020 message that interest rates would remain low for longer than markets expected. He said Monday that the bar “must remain high” for use of these tools in the future.
He also discussed the central bank’s work on the next generation of economic models, which aim to improve the role of supply chains and distinguish between inflation that comes from demand and inflation that comes from rising input costs.
The models will also help policymakers manage uncertainty using alternative scenarios, Macklem said, as the bank will be able to build scenarios with different assumptions about key inputs to the Canadian outlook, such as the price of oil or the strength of the U.S. economy.
-With assistance from Randy Thanthong Knight.
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