It is not often that we see a central banker look at the future with as much concern as Governor Stephen Poloz did today, when he announced there will no change in the central bank’s policy rate currently set at 1.25%. The Governor does not like what he has seen so far and is very concerned with the alarming protectionist behavior emanating from Canada’s neighbor to the south. With nearly a quarter of 2018 behind us, the economic data so far has been disappointing and the prospects of any improvement are totally shrouded by the Trump Administration’s heavy-handed approach to NAFTA negotiations and, now the likelihood of high tariffs on important Canadian industrial exports.

The last half of 2017 was disappointing as Canadian GDP expanded at an annual rate of just 1.6 per cent compared to a rate of 4 per cent recorded in the first half year. Since the start of 2018, incoming data continues to disappoint. Home sales, especially in the strong markets of Toronto and Vancouver have soften considerably, in response to tougher mortgage regulations introduced in January. Clearly, the bank is worried about the impact of stricter lending requirements on demand. Accordingly, the bank maintains that “it will take some time to fully assess the impact of these [rules] on housing demand and prices." Also, "the bank continues to monitor the economy's sensitivity to higher interest rates." The bank does not want to be the architect of a major housing slump at a time when other economic activities are weakening.

With Canada relying on 25 percent of its GDP from the external sector, the widening trade deficit will reduce GDP performance in the first quarter of 2018. Given the protectionist bent in the United States, it is hard to imagine that exports will rebound anytime soon. Perhaps, stating the obvious, the bank said: “trade policy developments are an important and growing source of uncertainty for the global and Canadian outlooks.” Given the highly charged political atmosphere in the United States regarding trade policy, there is no clear resolution in sight in the coming weeks or even coming months.

While business investment has picked since the oil shock of 2014, this sector is now caught in the cross-hairs of the U.S. protectionist stance, especially as the NAFTA negotiations have been linked by Trump to the proposed tariffs on Canadian steel and aluminum exports. The web of trade just become more tangled than ever before. The bank is worried that entrepreneurial decisions are being directly impacted by so much uncertainty on the trade front. The bank’s position can best summarized as: we are no hurry to raise rates further. There are too many danger signals flashing at this time.