Introduction
Good morning. It’s a pleasure to be here in Alberta. I want to thank Calgary Economic Development for the invitation. The last time I spoke in Calgary was about 18 months ago—September 2023. The post-pandemic crisis was easing, but uncertainty remained. Inflation was still above 3%, and the Bank of Canada’s policy interest rate was 5%. Canadians were being squeezed by still-elevated inflation and higher interest rates. Could we get inflation back to our 2% target without tipping the economy into recession?
As 2024 closed out, this question was largely resolved. Inflation was on target, and economic growth had picked up. The Canadian economy was in good shape.
Inflation came down through the first half of last year and had been close to 2% since last summer. As the Bank’s Governing Council became more confident that inflation was on track to return to target, we began reducing our policy interest rate, starting last spring. Substantial rate cuts through the rest of the year boosted household spending, and economic growth picked up to 2.2% in the third quarter and 2.6% in the fourth. Employment growth also strengthened in November through January, and the unemployment rate came down.
The Canadian economy managed a soft landing. Unfortunately, we’re not going to stay on the tarmac for long.
We now face a new economic crisis. Since President Trump began threatening to impose a wide range of tariffs on Canadian exports, uncertainty has increased sharply. Depending on the extent and duration of tariffs, the economic impact could be severe. The uncertainty is already causing harm.
There’s a lot we don’t know. Some new tariffs are in place on steel and aluminium as well as on goods not in compliance with the Canada-US-Mexico Agreement. We don’t know how long these will last. And we don’t know if tariffs will broaden to other sectors. In the last two months, the US administration has twice imposed and then retracted universal tariffs on all imports from Canada and Mexico. President Trump has also threatened to extend tariffs to a wide range of industries, including autos, semi-conductors and pharmaceuticals. And he has repeatedly said new “reciprocal” tariffs are coming on April 2 on many countries, although what exactly this means is unclear.
Most disturbing of all for Canadians, President Trump has threatened our sovereignty, repeatedly referring to Canada as the 51st state. There can be no question about our sovereignty or our border.
Last month, I gave a speech about the effects of broad-based tariffs on the Canadian economy. Today I want to advance the discussion in three ways.
First, I want to discuss what tariffs could mean for specific sectors—and specific regions—of the country.
Second, I’ll talk about the impacts of uncertainty caused by on-again, off-again tariffs and threats of more to come. Canadian businesses and households are doing their best to navigate the unpredictability of US policy, and that uncertainty is affecting our economy.
Finally, I’ll talk about how the Bank is navigating monetary policy in the face of unusual uncertainty. Monetary policy cannot solve a trade war. And we can’t make the uncertainty go away. But we can make sure we don’t add to it by ensuring inflation remains anchored on our 2% target. Canadians are worried about trade uncertainty. We don’t want them to have to worry about inflation as well.
We have a lot of ground to cover, so let’s get started.
Tariffs and uncertainty will hurt key sectors and regions
In my speech last month, I outlined how the universal tariffs on Canada and Mexico that were threatened by President Trump would impact the Canadian economy. I outlined the channels and broad impacts of a 25% tariff on non-energy exports and 10% on energy exports, together with the retaliatory tariffs proposed by the Canadian government. Our economic models predict exports and business investment would decline sharply, the economy would work less efficiently, and we would earn and consume less. Higher tariffs would also increase prices, causing inflation to rise for a period as the upward pressure on prices from higher costs would outweigh the downward pressure from a weaker economy.
Since that speech in February, the level and timing of tariffs have changed several times. And there remain too many unknowns to predict what happens next.
But we know that the tariffs and the uncertainty—if they are maintained—will particularly hurt a few key sectors. And that will have a big impact on Canada’s regional economies, including here in Western Canada.
As those of you in the room know all too well, for Alberta the hit to the energy industry from a 10% tariff is a major concern. It’s also a big issue for Midwest US refineries that have invested heavily in equipment to refine heavy Canadian oil. Roughly 94% of Canadian crude oil exports go to the United States, mostly through north-south pipelines.
The launch of the Trans Mountain Expansion pipeline has increased the access of Canadian oil to overseas markets, and new export capacity for liquefied natural gas (LNG) is coming online. This helps to diversify the markets for Canadian energy exports, but these investments were designed to augment our export capacity—not replace US demand.
Looking ahead, US tariffs could put downward pressure on Canadian energy prices and reduce the profitability of Canadian energy producers—at least until access to other markets can be expanded. The hit to profits combined with the uncertainty means that investment will likely drop, and employment could follow. I know Albertans have lived through boom-and-bust commodity cycles for generations. But a threat to the Canada-US energy relationship is not something we’ve ever had to contemplate.
The other Prairie provinces are also being affected. The United States has temporarily exempted fertilizers, including potash, from tariffs. And they’ve lowered the planned tariffs from 25% to 10% for non-compliant exports. But uncertainty remains. Spring seeding will soon begin, and farmers on both sides of the border are already feeling pressure from low grain prices. US farmers import potash from Saskatchewan to add potassium to their soil, while Canadian farmers often need US phosphate to fertilize their crops. Other tariffs will have an impact, too. Canadian farmers buy machinery and equipment from the United States. And China has said it will impose a 100% tariff on Canadian canola oil and meal, effective today. China is the top market for Canadian canola—the export value is close to $5 billion. It’s a very difficult situation so close to planting season and adds to the uncertainty Canadian farmers are already facing.
Other parts of the country, particularly Ontario and Quebec, will be disrupted by the 25% tariffs on steel and aluminum. In 2024, the United States imported about one-quarter of its steel and 40% of its aluminum from Canada, and Canada imported one-quarter of its steel and one-fifth of its aluminum from the United States. Those cross-border flows means that these sectors would be hit by both US tariffs and counter tariffs. It’s going to hurt output and increase prices.
Monetary policy cannot target specific industries or regions. We have one monetary policy for the whole country. But to assess the overall implications of new tariffs, it’s critical we understand their impact industry by industry and how this is affecting and spilling over across regions.
The Bank’s regional offices across the country—in Halifax, Montréal, Toronto, Calgary and Vancouver—gather economic intelligence across industries and economic regions. I am pleased to be joined by Farrukh Suvankulov, head of our Calgary regional office, which covers the Prairies and Northwest Territories. Our Calgary office is our second-largest after our headquarters in Ottawa.
Pervasive uncertainty
Beyond the impacts of tariffs, the pervasive uncertainty created by the sudden and unpredictable shifts in US trade policy is affecting both the Canadian and US economies.
Trade policy uncertainty measures—such as the index in Chart 1—have spiked in recent months. After more than 50 years of high predictability in trade policy, there was a sharp increase in uncertainty during President Trump’s first term in office. But that uncertainty doesn’t come close to what we see now.
