Canada’s central bank kept its key lending rate at 2.25 percent on Wednesday, citing signs of economic improvement with businesses adjusting to new trade relations under US President Donald Trump.
Canada’s economy has been reeling over the past year as Trump’s tariffs squeezed key sectors such as auto manufacturing, caused job losses and caused concern in the business community.
Canada entered a technical recession earlier this year after reporting two consecutive quarters of economic contraction.
But the Bank of Canada on Wednesday showed signs of a rebound.
“Canada’s economy is showing signs of improvement,” the bank said.
Bank of Canada Governor Tiff Macklem noted that while uncertainty around “US trade policy continues to be a headwind, consumers have been resilient and businesses are adapting.”
Exports are growing as businesses explore new ways to cope with US free trade still limited in some sectors, Macklem said.
“They are reconfiguring their supply chains,” he told reporters.
“The other factor is that the American economy is strong … they need our exports and you’re seeing American businesses increasingly increasing their orders for our Canadian exports.”
Trump on July 1 refused to renew the North American Free Trade Agreement, but it remains in place while the United States, Canada and Mexico negotiate revised terms.
The survival of the agreement known as the USMCA means that approximately 85 percent of US-Canada trade has remained tariff-free.
But Prime Minister Mark Carney has warned that US trade will not return to a pre-Trump normalcy and is pushing Canada to aggressively pursue new markets overseas.
Macklem said there were indications that was happening, pointing to aluminum, a key Canadian sector facing punishment from Trump’s tariffs, where businesses are “finding new customers in Europe.”
– Iran was –
Conflict in the Middle East remains a major risk factor, Macklem added, with hostilities between the US and Iran resuming after a short-lived ceasefire.
The bank has said it would not overreact to energy price inflation caused by the conflict and would only move to raise rates if it saw clear evidence that elevated oil prices were trickling down to other parts of the economy.
“So far, we’re not seeing large spreads of higher energy prices,” Macklem said.
Macklem pointed out that a key factor would be how long oil prices stay high.
“The war is going on and of course I can’t predict when it might be resolved,” he said.
Any sign that war-related inflation was causing overall price increases would be “a red flag,” potentially prompting interest rate hikes, Macklem added.
