BoC’s Macklem: Tariff threat affecting Canadian Dollar more than interest rate differences
Bank of Canada Governor Tiff Macklem said late Wednesday that the central bank can’t repair the economic damage of a trade war with the US, but he will do his best to make it less painful, per Bloomberg.
Key quotes
A big increase in tariffs is a big disruption to the Canadian economy. Monetary policy can’t fix that.
Can mitigate impact of tariffs, avoid abrupt changes.
Aims to ensure any tariff-related CPI spike is temporary.
We have restored low inflation.
Tariff threat affects Canadian Dollar more than interest rate differences.
Household debt is not sustainable for consumption growth.
Trade battles would reduce economic efficiency.
Market reaction
At the time of writing, the USD/CAD pair is trading 0.14% lower on the day to trade at 1.4405.
Tariffs FAQs
Tariffs are customs duties levied on certain merchandise imports or a category of products. Tariffs are designed to help local producers and manufacturers be more competitive in the market by providing a price advantage over similar goods that can be imported. Tariffs are widely used as tools of protectionism, along with trade barriers and import quotas.
Although tariffs and taxes both generate government revenue to fund public goods and services, they have several distinctions. Tariffs are prepaid at the port of entry, while taxes are paid at the time of purchase. Taxes are imposed on individual taxpayers and businesses, while tariffs are paid by importers.
There are two schools of thought among economists regarding the usage of tariffs. While some argue that tariffs are necessary to protect domestic industries and address trade imbalances, others see them as a harmful tool that could potentially drive prices higher over the long term and lead to a damaging trade war by encouraging tit-for-tat tariffs.
During the run-up to the presidential election in November 2024, Donald Trump made it clear that he intends to use tariffs to support the US economy and American producers. In 2024, Mexico, China and Canada accounted for 42% of total US imports. In this period, Mexico stood out as the top exporter with $466.6 billion, according to the US Census Bureau. Hence, Trump wants to focus on these three nations when imposing tariffs. He also plans to use the revenue generated through tariffs to lower personal income taxes.
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