By Promit Mukherjee and David Ljunggren
OTTAWA, March 20 (Reuters) – The Bank of Canada on Thursday said the uncertainty over the effect of U.S. tariffs meant it had to change the way it conducted monetary policy to become less-forward looking than normal.
In a speech, Governor Tiff Macklem said the bank would be focusing less on policy for a specific outlook and more on policy that worked for different outcomes.
Macklem said if the bank guessed where the economy was going and made a mistake, its actions could be ineffective or make matters worse.
“So we need to set policy that minimizes the risk. That means being less forward-looking than normal until the situation is clearer,” he told a business audience in Calgary, the heart of the oil-rich province of Alberta.
“And it may mean acting quickly when things crystallize. We need to be flexible and adaptable,” he continued, without giving specific details.
Macklem reiterated that there could be no doubt about the bank’s commitment to low inflation, saying it had to ensure higher prices from tariffs did not spread.
The BoC says the constant threat of tariffs and the resulting unpredictability are hurting business investments and consumer sentiment as the United States, by far Canada’s biggest trading partner, flips flops on trade policy.
“When we have this high degree of uncertainty around the base case, we give more consideration to the risks,” Macklem said. The BoC will announce its next monetary policy decision on April 16 which will be accompanied by a new set of projections.
The unpredictability makes it unclear how much tariffs will dent demand and how much they will be passed on to consumer prices, Macklem said.
The more inflationary the impact, the more focus monetary policy has to put on anchoring inflation expectations, which risk drifting up when inflation rises more and more quickly.
The BoC aims to keep inflation at 2%, the mid-point of its 1-3% target range.
Macklem said sectors such as energy and agriculture were highly exposed to the prospect of tariffs.
To try to keep inflation anchored, the BoC will closely track the pass-through of consumer prices, improve its analysis and enhance its communications, he said.
Macklem said inflation, which the bank managed to quell and bring it down to its target, was likely to rise.
“The Canadian economy managed a soft landing. Unfortunately, we’re not going to stay on the tarmac for long. We now face a new economic crisis,” he said.
(Reuters Ottawa editorial)
Keywords: CANADA CENBANK/
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