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Economy ‘progressing well’ despite trade uncertainty, Bank of Canada says

The Bank of Canada is seen Wednesday September 6, 2017 in Ottawa.The Bank of Canada keeps its key interest rate target on hold at 1.25 per cent. THE CANADIAN PRESS/Adrian Wyld

Canada's economy is "progressing well" in the face of protectionist threats and the impact of higher interest rates on heavily indebted consumers and homeowners, a top Bank of Canada official says.

"While the future is subject to some notable uncertainties … trends over the past few quarters have been quite encouraging," deputy Governor Timothy Lane said on Thursday in an early afternoon speech to the Vancouver Board of Trade.

Mr. Lane spoke less than an hour after news emerged that Canada would officially receive a temporary exemption from new U.S. tariffs on steel and aluminum imports. He called the news "encouraging."

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Afterward, speaking with reporters, he underlined how quickly the news around steel has shifted in only a few days.

"It's still a pretty fluid situation and I would say we're not in a situation of calling all clear," he said.

"I would say there's still a significant degree of uncertainty around the future trade regime."

During his speech, Mr. Lane said that despite a marked slowdown in economic growth at the end of 2017, the Canadian economy, over all, is "progressing much as we thought it would." He cited solid global economic growth, the historically low jobless rate and a nascent uptick in wages among the positives.

His relatively upbeat remarks come a day after the central bank opted to keep its benchmark interest rate at 1.25 per cent. The Bank of Canada has raised rates three times since last July.

Moving gradually on rate hikes is giving the bank time to take stock of new economic data and a host of uncertainties, he explained.

"We've been balancing the risk of undermining the economic expansion by moving too quickly with the risk of delaying too long and needing to raise rates sharply later to rein in inflation," Mr. Lane said.

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Many analysts who had been expecting as many as three more rate hikes this year now say the central bank may raise rates just one more time in 2018 and remain on hold for the next several months.

Mr. Lane acknowledged that the bank's main interest rate, which sets the trend for short-term interest rates throughout the economy, remains well below the neutral level of 2.5 per cent to 3 per cent – the point where interest rates neither spur economic activity nor put the brakes on growth.

Right now, the bank's main interest rate is set "appropriately" low to offset a spate of challenges, including U.S. protectionist threats, the fate of the North American free-trade agreement, competitive challenges facing Canadian exports and the weight of high household debt levels, he said.

He added that the bank is closely watching the continuing NAFTA talks and growing global trade tensions.

"Recent developments with respect to steel and aluminum … alongside heightened protectionist rhetoric, can potentially carry quite serious economic consequences," he said.

Canada is the United States' largest supplier of steel and aluminum.

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Mr. Lane said the outcomes of U.S. trade policies are too uncertain to quantify.

"Our working assumption is that existing trade arrangements will stay in place over our two-year projection horizon," he said. "When concrete outcomes emerge, we will be in a better position to assess their impact on the Canadian economy."

Nonetheless, trade uncertainty coupled with recent U.S. tax cuts are already acting as a chill on investment in Canada, he said. The result is likely to "dampen" business investment as companies redirect spending to the United States, he pointed out.

Mr. Lane also suggested investors should brace for more volatility in financial markets as central banks end years of ultralow interest rates.

"We may be reaching a turning point where the volatility-suppressing effects of monetary policy are diminishing and more normal levels of volatility are returning to markets," he said.

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