BoC’s Macklem: Trump’s tariffs the “biggest headwind”
Bank of Canada Governor Macklem spoke with the New York Times, saying that US President Donald Trump’s tariffs are the biggest headwind for the country.
Key quotes
Trump’s tariffs are the “biggest headwind” for the country.
The “most important imperative” is for Canada to reach a new trade deal with the US.
The impact of the tariffs isn’t showing up yet in economic data, policymakers will be “carefully” tracking the extent to which they impact consumer prices.
Market reaction
At the time of writing, the USD/CAD pair is trading 0.03% lower on the day to trade at 1.3730.
Bank of Canada FAQs
The Bank of Canada (BoC), based in Ottawa, is the institution that sets interest rates and manages monetary policy for Canada. It does so at eight scheduled meetings a year and ad hoc emergency meetings that are held as required. The BoC primary mandate is to maintain price stability, which means keeping inflation at between 1-3%. Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Canadian Dollar (CAD) and vice versa. Other tools used include quantitative easing and tightening.
In extreme situations, the Bank of Canada can enact a policy tool called Quantitative Easing. QE is the process by which the BoC prints Canadian Dollars for the purpose of buying assets – usually government or corporate bonds – from financial institutions. QE usually results in a weaker CAD. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The Bank of Canada used the measure during the Great Financial Crisis of 2009-11 when credit froze after banks lost faith in each other’s ability to repay debts.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Bank of Canada purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the BoC stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Canadian Dollar.
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