Bank of Canada: GDP level would be permanently hit by protracted U.S. trade war

By Promit Mukherjee and David Ljunggren

OTTAWA, Feb 12 (Reuters) - The Bank of Canada's governing council felt that a protracted trade conflict with the U.S. would permanently shrink the level of domestic GDP, the minutes of a policy decision meeting showed on Wednesday.

The BoC trimmed its key policy rate by 25 basis points to 3% on January 29, its sixth reduction in a row, but cited the risks to the economy should U.S. President Donald Trump go ahead with a threat to impose a tariff on all imports from Canada.

Trump agreed last week to pause those tariffs on almost all goods imports for a month, but on Sunday said he would impose a 25% tariff on all steel and aluminum imports.

"It was clear that a protracted trade conflict would lead to a decline in economic activity," the minutes said. "Governing Council members also noted that the adverse impact on the level of GDP would be permanent, and the growth of GDP would be reduced until the Canadian economy adjusts to the tariffs."

Canada, which sends almost 75% of all its goods and services exports to the United States, has made clear it would retaliate, which the bank said could send inflation higher.

Consumer prices in Canada have been around the mid-point of the bank's 1% to 3% target range for almost six months but the economy is sluggish, prompting the rapid rate cuts.

The decision to cut rates by 25 basis points was influenced by the threat and uncertainty of tariffs as well as by a desire to support growth, the minutes said.

The BoC last month said the constant threat of tariffs was clouding its forecasts.

"Members acknowledged that it was impossible to predict what would happen with U.S. trade policy," the summary said.

The six-member team, which will be expanded to seven members from March, also noted a trade conflict would reduce incomes in Canada, disrupt supply chain, stoke inflation and weaken the Canadian dollar further.

Anecdotal evidence showed that some businesses in Canada were already evaluating moves to the U.S. and a tariff war could spur capital flight and hurt Canadian competitiveness, the minutes said.

The council will continue to monitor the impact of tariffs on the economy in real-time, paying more attention to supply chains and the links between sectors.

(Reuters Ottawa editorial)

Keywords: CANADA CENBANK/