Don't assume further rate cuts from the Bank of Canada, Poloz warns
Former Bank of Canada governor Stephen Poloz warned markets should not be assuming further rate cuts by the central bank, which will remain primarily focused on the inflation risk caused by tariffs over a weakening economy.
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'Inflation has been kind of firming lately, using the core measures the Bank of Canada pays attention to,' said Poloz, now special adviser to Osler, Hoskin & Harcourt LLP, during a webinar on Tuesday. 'And the counter tariffs that the government has put in place will start boosting inflation in the next couple of months.'
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On June 4, the Bank of Canada decided to hold its policy rate for the second straight time at 2.75 per cent, as it assesses how tariffs are affecting the Canadian economy.
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Bank of Canada governor Tiff Macklem said it was too early to see the impact of retaliatory tariffs on the published CPI data but expects to see those effects in the coming months. The Government of Canada imposed 25 per cent tariffs on almost $60 billion worth of United States goods in response to U.S. tariffs, although certain exemptions apply. Carney has also signalled further potential retaliatory tariffs.
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Poloz said the central bank had to learn a hard lesson during the post-pandemic era, when inflation unexpectedly jumped higher than expected. At the time, Macklem said inflation would be 'transitory.'
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'The central bank said, 'Don't worry, that's a transitory thing.' Well, transitory turned out to be two years,' said Poloz. 'Having learned that lesson the hard way, I think central banks are going to be much more preoccupied with inflation risks.'
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The Canadian economy grew by 2.2 per cent in the first quarter of this year, mainly as the result of a rise of exports, as businesses pulled forward their inventory to get ahead of U.S. President Donald Trump's tariff announcements. Macklem said he expects growth in the second quarter to be considerably weaker, while many economists are forecasting a recession this year.
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The unemployment rate also hit seven per cent in May, as tariff uncertainty continued to slow hiring demand and the manufacturing sector showed significant job losses in the last few months.
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Poloz said the deterioration in the labour market is a 'recessionary indicator' and he expects further layoffs as the result of tariffs in the coming months. This will be a point of concern for the Bank of Canada but Poloz noted that governments have shown a willingness to use fiscal policy to address the economic damage brought on by tariffs, while the central bank can remain focused on price stability.
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