17 April 2018

Geopolitics has been one of the key topics in Poloz’s recent statements, and now the situation is still uncertain. Although we’ve seen NAFTA negotiation improving, and the central bank’s poll shows no signs of strong influence on businesses, there are still reasons for the Bank to act carefully.

Concerns on NAFTA changed to wider worries about the growing tension between China and the U.S. Moreover, the conflict between Alberta and British Columbia over a Kinder Morgan pipeline is increasing. It affects both the oil industry and the investment environment for Canada.

In addition to it, there’s one more important factor affecting the Bank’s decision. We’re talking about the so-called neutral rate, and it may also change. This measure is used for determining the stimulation level of the country’s policy. The larger the difference between the actual rate and the neutral rate, the more stimulative the current policy. The smaller the gap, the fewer rate increases are expected.

The national economy has become more vulnerable to rate changes because of Canada’s relatively high household debt level. So the final resting place for borrowing costs is lower than the Bank’s estimated 2.5%-3.5%. It means less room for raising rates.