Bank of Canada Deputy Sees ‘Dilemma’ on Trade War, Energy Shock

A senior Bank of Canada official said the central bank’s rate-setting body is in a “dilemma” and having spirited discussions about how to balance the impact of the trade war against the inflation effects of high energy prices.

“It’s a very complex situation,” Deputy Governor Toni Gravelle said Tuesday at the Bloomberg Canadian Finance Conference in New York. “We’ve been having very vigorous, deep debates and trying to understand what’s happening.”

Gravelle reiterated that officials are worried that higher fuel costs will eventually pass through to other goods and services, creating broader inflation pressures. At the same time, simmering trade tensions between Canada and the US causes uncertainty and may indirectly hit economic growth.

“The trade conflict escalation, that might be pushing down growth, while at the same time we have this sort of longer-lasting energy shock that has increased potential for second-round effects,” Gravelle said. “So that is why we’re having a lot of debate and diversity of views.”

His comments reinforce the market’s view that the next Bank of Canada meeting on Oct. 28 is a live decision. Traders in overnight swaps put the odds of a rate hike at about 50-50 for that meeting, and they’re pricing 100 basis points of hikes by June.

At its September meeting, the bank held its key policy rate at 2.25% for a seventh consecutive meeting. A summary of deliberations from that decision showed some differences of opinion about how wide the output gap was, though members agreed the economy was in excess supply.

Unlike the Federal Reserve, the Bank of Canada sets rates by consensus rather than votes. Individual views of council members aren’t published.

Headline inflation has held around 3% for months. While core measures are near the bank’s 2% target on a yearly basis, pressure on the monthly trend has increased. Statistics Canada’s next inflation report is Oct. 19.