Monetary policy can ‘only do so much’ in face of tariffs

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Former Bank of Canada deputy governor Paul Beaudry says there are limits to what monetary policy can do to alleviate the effects brought on by tariffs.

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“By itself (monetary policy), it can only do so much, it can’t be thought of as lifting everything,” Beaudry said. “Monetary policy cannot carry all that weight, and we need other adjustments.”

Beaudry, a professor of economics at the University of British Columbia and senior advisor to Bennett Jones LLP, presented an economic outlook for the law firm on Wednesday, sharing his views on where interest rates and growth are headed next year.

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The Bank of Canada made a second consecutive half-point cut to its policy rate on Wednesday, bringing the overnight rate down to 3.25 per cent, right at the top of the central bank’s neutral range.

Beaudry expects the bank will continue to cut in the new year, before pausing once it hits 2.75 per cent.

“I think we’ll see another cut right at the beginning of next year then kind of into the spring, and then sometime after that we’ll get into the bank’s neutral range,” he said.

Beaudry added that if tariffs are enacted and growth slows, then the central bank may have to cut more.

“There might be even more cuts to react to that, as we go forward,” he said.

However, Beaudry thinks Canada will require other adjustments if tariffs are implemented, including creating conditions to lift business investment’s share of gross domestic product by three to five per cent, safeguarding the U.S.-Canada relationship, developing a national strategy to address Canada’s productivity problem and doing a better job of commercializing and scaling up Canadian companies.

Earlier this year, the International Monetary Fund projected Canada’s growth to come in at 2.1 per cent, although that number is now under review due to incoming U.S. president Donald Trump’s threat to impose a 25-per cent tariff on all Canadian exports when he takes office in the new year.

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According to its latest economic outlook, Bennett Jones LLP expects Canada’s economy to grow by 1.5 per cent next year. The growth forecast assumes Trump will reconsider his 25-per-cent tariff threat to Canada but still accounts for other trade risks brought on by the new administration’s economic agenda.

The growth projection also considers the slowdown in population growth next year, brought on by changes in immigration targets announced by the federal government this past fall.

“The implications for the population of Canada will not be as fast as the federal government has been predicting, we don’t think there will be negative population growth next year,” Beaudry said. “We do think immigration will be reduced quite a bit and that’s going to slow things down.”

The one silver lining in the third quarter results for Canada’s GDP was that consumer spending began to rebound. Beaudry thinks that uncertainty could put an end to that.

He also said mortgage renewals going into next year pose less of a risk to the economy.

“Those rates have really come down, now they might be a bit higher than what people expected but not that much, so I think there is a lot of relief there and I think that cliff is a lot less deep,” he said.

• Email: jgowling@postmedia.com

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