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Tariffs

Central Banks Navigate Uncertainty Amid Trump's Trade War

Strategic Insights

— 2 min read

With US President Donald Trump's trade policies creating turmoil, central banks in Canada and the United States are set to hold interest rates steady this week. The Bank of Canada and the US Federal Reserve are expected to maintain their current rates, although uncertainty surrounding the trade war's impact on inflation and economic activity is making decision-making challenging. The Fed is dealing with an additional complication, as Trump's attacks on Fed Chair Jerome Powell have raised concerns about the central bank's independence. Meanwhile, analysts warn that trade wars can hurt economic activity and push up unemployment, which could put downward pressure on inflation over time.

Key Takeaways:

  • The Bank of Canada is expected to keep its policy rate at 2.75 per cent for the third consecutive time.
  • The US Federal Reserve is expected to keep the benchmark federal funds rate in the 4.25 per cent to 4.5 per cent range.
  • Central bankers are navigating waves of uncertainty created by Trump's trade policy and attacks on Fed Chair Jerome Powell.
  • The trade war has created a chaotic backdrop for monetary policy, forcing central bankers to wait-and-see mode.
  • The Fed is dealing with the added complication of Trump's attacks on Powell, which have raised concerns about the central bank's independence.
  • Analysts warn that trade wars can hurt economic activity and push up unemployment, which could put downward pressure on inflation over time.
  • The Bank of Canada has opted not to publish a central forecast due to extreme uncertainty surrounding the trade war's impact on inflation and economic activity.
  • Derek Holt, head of capital market economics at Bank of Nova Scotia, says that central banks may need to refrain from forecasting due to the lack of clarity on trade policy and fiscal plans.
  • Royal Bank of Canada economists Mike Reid and Carrie Freestone predict that the Fed may need to remain on hold through the fall, potentially cutting rates in 2022.
  • The Bank of Canada has been on hold since April, and financial markets are pricing in less than 10-per-cent odds that the bank will cut on Wednesday.

Statistics:

  • Annual Consumer Price Index inflation in Canada was 1.9 per cent in June, below the central bank's 2-per-cent target.
  • Measures of core inflation have been stuck around 3 per cent since April and edging higher on a monthly basis.
  • Canada added 83,000 jobs in June, with an unemployment rate of 6.9 per cent.
  • Gross domestic product grew a respectable 2.2 per cent in the first quarter.
  • Interest-rate swap markets are currently pricing in only one quarter-point cut by the end of the year.

Sources:

  • Bank of Canada (April 2022) - "Monetary Policy Report"
  • Globe and Mail (July 2022) - "Central banks navigate uncertainty amid Trump's trade war"
  • Reuters (July 2022) - "Reuters poll of 28 economists finds all expect BoC to hold rates steady on Wednesday"

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