A senior Bank of Canada official said Monday the central bank is seeing encouraging signs that exports and business investment are broadening and strengthening.
In a speech to the Saskatoon Regional Economic Development Authority (SREDA), deputy governor Timothy Lane said international trade is key to Canada’s economic growth potential.
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However, he cautioned the central bank is also keeping close tabs on the rise in protectionist sentiment in some parts of the world and what it might mean for the Canadian economy.
Lane noted that populist movements in some of Canada’s major trading partners are demanding new trade barriers and that such protectionist measures would undoubtedly mean less trade which would reduce economic growth.
“With the rise in protectionist sentiment in some parts of the world, we have been entering a time of heightened uncertainty about the rules of the game on international trade,” said Lane, according to a prepared text of his speech released in Ottawa.
“The possibility of a material protectionist shift — particularly regarding the outcome of negotiations on possible changes to NAFTA — is a key source of uncertainty for Canada’s economic outlook.”
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Ongoing talks between Canada, the United States and Mexico to renegotiate the NAFTA agreement began this summer. U.S. President Donald Trump promised changes to the deal in his election last year and has threatened to end the agreement if he can’t make the changes he wants.
In his speech, Lane said expanded markets for Canadian exports have not been the only benefits from trade liberalization.
“We also benefit from the greater efficiencies that can be achieved by those exporters that do expand, the heightened competition and better access to imported inputs that come with greater openness to imports and the resulting spur to innovation throughout the GVCs (global value chains),” he said.
“If trading rules are changed in a way that undermines these benefits, the result would be both lost external demand for exports and lower potential growth for Canada as well as for the United States and other trading partners.”
The Bank of Canada raised its key interest rate target earlier this month, a move that was followed by the big Canadian banks raising their prime rates.
The Canadian dollar also moved higher in the wake of the increase, building on gains it has made so far this year.
The loonie is up more than 10 per cent from its lows of the spring, an increase that has made Canadian exports more expensive for buyers in the United States.
“We will be paying close attention to how the economy responds to both higher interest rates and the stronger Canadian dollar,” Lane said.
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