Tiff Macklem says he isn’t following every social-media post Donald Trump puts on his website Truth Social. But the Governor of the Bank of Canada is spending a lot of time scanning headlines as the President of the United States pounds the Canadian economy with an unending barrage of tariff threats.
“I will admit I find myself checking the news cycle more frequently than usual,” Mr. Macklem told The Globe and Mail in an interview on Wednesday.
Like many Canadians, the country’s top central banker is disoriented by Mr. Trump’s assault on Canada and the rules-based trading system that has underpinned North American prosperity for decades. It’s unclear what the President wants, Mr. Macklem said, but Mr. Trump seems prepared to stifle growth and reignite inflation on both sides of the border.
“We’ve had our trade spats before. This does not look like a trade spat. I worry that this is something more fundamental, more durable, and that that means our standard of living is going to be on a permanently lower path,” Mr. Macklem said.
The range of possible outcomes is vast. If the U.S. backs down on tariffs, the Canadian economy, after seven consecutive interest-rate cuts, is primed for a solid expansion in 2025.
But if Mr. Trump sticks to his protectionist guns, a recession in Canada in the coming quarters seems more likely than not. And looking further ahead, the country may be in for a wrenching adjustment as Canada’s many export-oriented industries lose open access to the American market. In that situation, there’s little monetary policy can do beyond making the transition to a new, less efficient economic order a little less painful.
All this puts the Bank of Canada in a tough spot. Having spent the past five years supporting the economy through COVID-19 and combatting the surge in inflation that followed, Mr. Macklem and his team are staring down a new and potentially perilous crisis, with fewer tools at their disposal this time around.
A trade war is different from other kinds of economic shocks. U.S. tariffs hurt Canadian businesses and kill jobs. But retaliatory tariffs against American goods, a depreciating loonie and supply chain disruptions raise consumer prices in Canada. This can produce the dreadful combination of stagnation and inflation that economists call “stagflation.”
In this environment, a central bank with a mandate to control inflation needs to tread cautiously.
On Wednesday, the Bank of Canada cut its benchmark interest rate by a quarter of a percentage point to 2.75 per cent to help cushion the impact of trade disruptions. But Mr. Macklem warned that the bank would “proceed carefully” with future rate decisions, and suggested it won’t slash interest rates to near zero, as it has in response to previous economic emergencies.
Like most Canadians, Mr. Macklem appears stunned by Mr. Trump’s assault on Canada and the rules-based trading system that has underpinned North American prosperity for decades.Ashley Fraser/The Globe and Mail
“We can’t let a tariff problem become an inflation problem,” Mr. Macklem told The Globe shortly after the rate announcement, sitting in an airy, glass-walled room in the Bank of Canada’s headquarters in Ottawa.
“The interest-rate response is not going to look like COVID, it’s not going to look like 2008,” he said. In both those crises, the bank rapidly lowered its policy rate to 0.25 per cent – as low as it could go.
Put another way, the Bank of Canada is going to play a secondary role responding to the trade war. The federal government and the provinces will need to lead the charge to support hard-hit businesses and laid-off workers, and to strategize on how to punch back against Mr. Trump.
Mr. Macklem said he’s had regular conversations with former finance minister Dominic LeBlanc – who was replaced Friday by François-Philippe Champagne – and is sharing the bank’s analysis with the government. But he’s not in the driver’s seat, sometimes hearing about Canada’s retaliatory measures against the U.S. as they’re announced.
“I’m certainly very aware of the direction of what they’re thinking, where they’re heading. [But] given the announcements are almost daily, yes, I mean, I’m reading some things in the news like everybody else,” Mr. Macklem said.
In many ways the central bank, and the Canadian economy more broadly, is entering the trade war on a solid footing. Having topped 8 per cent in 2022, the annual rate of inflation has been back around the central bank’s 2-per-cent target since last summer. That’s allowed the bank to lower its policy rate by 2.25 percentage points over the past nine months, bringing borrowing costs for businesses and homeowners down to a more neutral level.
Meanwhile, Canada’s gross domestic product grew at an annualized rate of 2.6 per cent in the fourth quarter of 2024, well ahead of Bay Street and Bank of Canada forecasts, while upwardly revised data for the third quarter showed the economy responding well to rate cuts through the back half of last year.
All this could change rapidly. The threat of tariffs is already weighing on Canadian consumer and business confidence. A Bank of Canada survey, conducted last month and published Wednesday, shows consumers are increasingly worried about losing their jobs and they are planning to spend less, while businesses are freezing hiring and pausing investment plans. This shift in sentiment will hammer the economy even before tariffs actually start to bite exporters.
A person shops at a grocery store in Montreal in February. A recent Bank of Canada survey shows consumers are increasingly worried about their job security and planning to spend less amid the mounting economic uncertainty.ANDREJ IVANOV/AFP/Getty Images
“The challenge with the shock is that three months from now Canada’s economy could very well be accelerating, and we could be close to the end of monetary policy easing, or we could be seeing the whites of the eyes of a recession,” Frances Donald, chief economist at Royal Bank of Canada, said in an interview.
“So the Bank of Canada must be incremental. It has to push back against forward guidance because a predetermined path, when you’re operating with this level and spread of outcomes, is really difficult,” she said.
Looming in the background is the risk of reigniting inflation, which was only recently tamed. An economic slowdown and rise in unemployment would curtail demand and put downward pressure on inflation over time. But there are a number of near-term factors that could increase consumer prices.
Ottawa’s retaliatory tariffs on some $60-billion worth of U.S. goods will directly increase their prices, while a depreciation of the loonie – which has fallen to around 69.5 US cents from 74 US cents in September – makes all imports from the U.S. more expensive. Companies that face tariffs and supply chain disruptions appear keen to pass these costs along to customers, according to the bank’s recent survey.
Canadian and American flags fly on the Canadian side of the Ambassador Bridge in Windsor, Ont. Ottawa’s retaliatory tariffs on some $60-billion worth of U.S. goods will directly increase their prices, while a depreciation of the loonie makes imports more expensive.GEOFF ROBINS/AFP/Getty Images
The crucial thing is making sure any jump in prices caused by supply chain disruptions doesn’t feed into higher inflation expectations and become self-reinforcing, as happened in 2021 and 2022, said Paul Beaudry, an economics professor at the University of British Columbia who was a deputy governor at the Bank of Canada from 2019 to 2023.
Central bank communication is crucial here, Mr. Beaudry said in an interview. “If you can make the message hawkish enough, then you can be dovish.”
“This is where the kind of funny thing is,” he continued. “If [Macklem] convinces people that, actually, there might be a bit of inflation that will be one-off as we put these tariffs on, and then it doesn’t start a process, then you can kind of let that go and actually keep interest rates lower. So you’re allowed to do more to help if you can convince the market that you haven’t got your eye off the ball.”
Mr. Macklem will have a new partner in the Prime Minister’s chair as he navigates the uncertainty and contradictions of a trade war: his former boss, Mark Carney.
The current Governor bats away questions about his relationship with the former governor of the Bank of Canada and Bank of England, citing the principle of central bank independence from politics. Do you guys get along well? “Next,” he deadpans.
Prime Minister Mark Carney, former governor of the Bank of Canada, where he worked with Mr. Macklem, holds a news conference following his swearing in ceremony at Rideau Hall in Ottawa on March 14.Adrian Wyld/The Canadian Press
It’s an awkward topic, given that central bankers, like judges, are meant to be non-partisan, and Mr. Carney breached that norm by becoming a politician. But Mr. Macklem said that Canadians can rest assured that he, himself, has no political ambitions.
“There is nowhere I’d rather be than right here, Governor of the Bank of Canada. I think you can see I’ve got my hands more than full,” he said.
And indeed he does. Not only does Mr. Macklem need to help steer the economy through the biggest trade shock in 100 years, he also needs to help Canadians prepare mentally for hard days and hard choices ahead. If the U.S. is no longer a reliable partner, Canadians will need to rethink many of the foundations of the country’s economy, and pursue major reforms to improve internal trade, infrastructure and business competitiveness.
“The only way to offset a negative structural shock is to have some positive structural reform. So, if we want to maintain a rising standard of living, we’re going to have to think about what we do as a country to offset those headwinds,” Mr. Macklem said.
Mr. Trump may yet see reason and come to the negotiating table with Canada, potentially rejigging the United States-Mexico-Canada Agreement, the continental free-trade pact, in a way that favours the U.S. but at least provides certainty to Canadian businesses. But the President may also throw the whole open trading system into the wood chipper.
“I hope that’s not the case,” Mr. Macklem said. “There are costs to both countries. It makes no sense whatsoever. We can both be better off. Why wouldn’t we want that? Why wouldn’t we do that? But here we are.”