USA tariffs on the auto sector's integrated cross-border supply chains would have "large impacts on investment and employment", the Bank of Canada warned Wednesday in its accompanying monetary policy report.
As widely anticipated by economists, the Bank of Canada raised its trend-setting policy rate to 1.5 per cent, up from 1.25 per cent on Wednesday.
The rate increase, by a quarter of a percentage point, took the bank's overnight interest rate to 1.50 percent, still well below the "neutral" rate of 2.5-3.5 percent the bank sees as a sweet spot for monetary policy, where it neither boosts nor restrains growth.
Thanks to stronger economic data, experts are predicting governor Stephen Poloz to hike the rate from its current level of 1.25 per cent. Yet, the Canadian dollar is lower, reflecting broad-based U.S. dollar strength and concerns about trade actions. This is contributing to financial stresses in some emerging market economies. -Canada trade dispute would figure prominently in the bank's decision-making process for today's rate announcement.
CPI and the Bank's core measures of inflation remain near 2 per cent, consistent with an economy operating close to capacity.
The bank said USA steel and aluminum tariffs imposed in June and retaliatory countermeasures by Canada in July would trim exports, imports and economic growth, and boost inflation, but strong global demand and higher commodity prices were offsetting the tariff headwind.
The country's inflation rate is expected to rise as high as 2.5% - above the 2% mid-point of the bank's target range - due to temporary factors such as higher gasoline prices. The Bank estimates that underlying wage growth is running at about 2.3 per cent, slower than would be expected in a labour market with no slack. It's expected to settle back down to 2% in the second half of 2019.