Bank of Canada Governor Tiff Macklem has managed to wrestle inflation back under control. But a looming US-Canada tariff war now threatens to undo his work on price stability.
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The bank instead published a hypothetical but grim scenario where the US imposes permanent 25% levies on all goods it buys from its northern neighbor and Canada retaliates in kind, with pass-through prices to consumers increasing gradually. Such actions would lower gross domestic product growth and accelerate inflation in both economies.
For Canada, the trade conflict would negatively affect both exports and imports, especially because the US is its largest trading partner. The country’s trade balance would also worsen. Lower net export volumes and weaker terms of trade would then lead to a depreciation of the loonie, which has already been weakening against the US dollar in recent months.
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