The Bank of Canada confirms its rate hike despite NAFTA Trade Agreement uncertainties
|The Bank of Canada’s Governing Council confirmed an increase of its overnight interest rate on Wednesday of 25 bps to reach 1.25% following strong economic data ahead of NAFTA’s sixth out of seven scheduled rounds of negotiations. By raising its interest rate, Canada confirms the healthy conditions in which its economy and its partners are lying to right now and maintains inflation on target. With a jobless rate of 5.70% (lowest rate since September 30th 2007) and Y/Y November CPI of 2.10%, the Canadian economy is approaching full employment capacity but this doesn’t suffice for having investors to neglect coming difficulties it might have to overcome next week NAFTA meeting (January 23rd 2018). The loonie instantly fell by 0.8% (CAD/USD remaining at 0.8054; +1.05% YTD though) against the greenback following BoC Governor Stephen Poloz’s recall of uncertainties surrounding NAFTA’s denouement, as the impact of slowing foreign direct investment is already hampering the economy.
Trump’s aggressive protectionism policy also poses considerable difficulties for US industrials and farmers who warned Trump not to quit NAFTA, as tariffs could considerably escalate and render American producers’ prices less attractive for their neighbors (Mexico and Canada being equivalent to 34% of US total exports as of 2016 according to the Congressional Research Service).
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We remain confident that the occurrence is unlikely, as the stakes are too high to be dismissed. Even Donald Trump confirmed to the Wall Street Journal last week that he would be “a little bit flexible” on the matter.
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