Canada’s GDP level would take permanent hit from drawn-out trade war with

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 central bank trimmed its key policy rate by 25 basis points to three per cent on Jan. 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, he said he would impose a 25 per cent 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.”

Threat of tariffs clouding forecasts

Canada, which sends almost 75 per cent of all its goods and services exports to the U.S., 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 one-to-three per cent 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 in 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.