Due to heightened geopolitical risks and uncertainties surrounding US trade policy, Bank of Canada Governor Tiff Macklem has warned that the Canadian economy faces an exceptionally high risk of a new shock.
In an interview with Reuters on Wednesday, Macklem stated that more variables than usual could affect the central bank’s economic projections.
Macklem stated, “There is an unusual potential for a new shock, a new disruption. There are increased geopolitical risks.”
He outlined several events that, when combined, would jeopardise Canada’s economic prospects.
These include the threats made by US President Donald Trump on Greenland, his ouster of the head of Venezuela, and his repeated promises to impose more tariffs on Canada.
According to Macklem, such actions worsen the already precarious global climate and raise the possibility that predictions won’t come to pass.
Forecasts seen as more vulnerable
In its most recent monetary policy report, the Bank of Canada released new estimates for inflation and economic growth on Wednesday and announced that it would hold interest rates.
The projections were mostly in line with the predictions published in October and indicated little increase in 2026 and 2027.
Macklem claimed that the dangers associated with the projections have grown in spite of this continuity.
We believe there are more potential problems with that forecast. “That forecast is more susceptible,” he stated.
Macklem cited Trump’s declaration on Saturday that the US would put a 100% tax on Canada if it pursues a trade agreement with China as an illustration of the kind of shock that may disrupt the outlook.
In addition to other uncertainties impacting the world economy, he mentioned the review of the free trade agreement between the United States, Mexico, and Canada as another source of risk.
Policy direction hard to judge
Macklem’s comments at a previous press conference were read by economists as favouring the need to boost growth, with some speculating that the tone had shifted toward a reduction in interest rates.
However, investors expect a greater likelihood of a rate hike in the last quarter, while financial markets are pricing in no rate decreases through 2026.
Macklem highlighted how challenging it is to evaluate the balance of risks in the current situation when asked if risks are more inclined toward a reduction or an increase later in the year.
“You need to be able to assign probabilities to the risks to comment on the balance,” he stated. “And I think we’re having trouble with that, to be honest.”
The wide variety of potential consequences associated with trade policy decisions and geopolitical developments, many of which are outside the control of Canadian policymakers, is reflected in this uncertainty.
Federal Reserve independence in focus
Another major concern this year, according to Macklem, is attacks on the US Federal Reserve’s independence.
Given that Trump has openly called on the Fed to lower interest rates, he claimed to have recently spoken with Fed Chair Jerome Powell.
Central bankers around the world are concerned about the problem.
Following Trump’s administration’s threat of a criminal indictment, the leaders of several of the largest central banks in the world, including Canada’s, released a unified statement this month endorsing Powell.
According to Macklem, he informed Powell in private that, despite the challenging conditions, he was doing a terrific job. He emphasised that the Fed’s function is not limited to the United States.
“A Federal Reserve that is stabilising the Us economy benefits both the US and Canadian economies,” he stated. “No one will benefit from a Federal Reserve that does not provide predictability.”
He went on to say that worries about the security of American assets are becoming more widespread, highlighting the intimate relationship between Canadian financial stability and trust in American institutions.
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