Bank of Canada governor warns of unusual potential for new economic shock due to Trump policy

By Promit Mukherjee and Maria Cheng

OTTAWA, Jan 29 (Reuters) - Bank of Canada Governor Tiff Macklem told Reuters he saw unusual potential for a new shock to the economy, given elevated geopolitical risks and U.S. trade policy.

Macklem said in an interview on Wednesday that?more factors than usual could deter Canada from achieving the bank's economic forecasts, citing U.S. President Donald Trump's threats toward Greenland, his removal of Venezuela's ?leader, and repeated threats to impose more tariffs on Canada.?

"There is unusual potential for a new shock, a new disruption," Macklem said.? "Geopolitical risks are elevated."

He cited attacks ?on the U.S. Federal Reserve's independence as another risk this year, and said he spoke to Fed Chair ?Jerome Powell recently. Trump has demanded publicly that the Fed cut interest rates.

FORECAST VULNERABLE

The ?BoC, which on Wednesday said ?it would keep its interest rate on hold, released new projections for the economy and inflation in its monetary policy report.

These forecasts for modest growth ?in 2026 and 2027 were largely similar to its estimates released ?in October, but Macklem believes there are more risks these projections could go wrong.

"We are feeling like there are more things that can go wrong around that forecast. That forecast is more ?vulnerable," he said.?

?Exemplifying such potential shocks, Trump said on ?Saturday he would ?impose a 100% tariff on Canada if it follows through on a trade deal with China.

Economists interpreted Macklem's comments at an earlier press conference as tilted toward the need for stimulating growth, predicting that ?the tone had become more inclined toward a cut to stimulate the economy.?

Money markets are pricing in no cuts through 2026, but investors see a higher chance of a hike in the last quarter.??

When asked whether he thinks risks are more tilted toward a cut or a hike later in the year, Macklem cited uncertainty.

"In order to comment on the balance, you need to be able to assign probabilities to the risks. And, to be honest, I think ?we're finding ?that difficult," he said.

The latest tariff threat from the White House and the review of the United States-Mexico-Canada free trade deal pose obvious risk to the bank's outlook, besides all the other uncertainties, he added.

FEDERAL ?RESERVE

Macklem said he has privately spoken with Powell and told him he was doing a good job under difficult circumstances.???

The chiefs of many of the world's ?major central banks, including Canada's, issued a joint statement in support of Powell?this month after Trump's administration threatened him with a ?criminal indictment.?

"A Federal Reserve that is providing stability to the U.S. economy is good for the U.S. economy; it's good for the Canadian economy," Macklem said. "A Federal Reserve that is not delivering predictability isn't going to be good for anybody."

He said the ?world was concerned about the safety of U.S. assets.?

Foreign investors want exposure to U.S. equities but hedge against the currency risk, which pulls the value of the dollar down.

"The unpredictability of U.S. policy has dented the U.S. dollar as the global safe asset. There's not a lot of great ?alternatives," he added.?

(Reporting by Promit Mukherjee, Maria Cheng, Kyaw Soe Oo and David Ljunggren; Editing by Caroline Stauffer, Rod Nickel)