In a press conference, Poloz said the Bank was concerned about the effects of USA trade policy, "because it is so fundamental to the Canadian economy", but because it is as yet unknown, it is hard to capture in the Bank's projections.
Governor Stephen Poloz says the combination of the heightened uncertainty around USA trade policy and the still-sluggish Canadian economy has left the door open to a potential cut to the central bank's benchmark interest rate.
Ignoring protectionism under Trump, the bank hiked its real GDP forecast for 2017 to 2.1% from 2.0% and maintained its 2018 growth forecast at 2.1%. The effects would be muted due in part to a cut in the US corporate tax rate, which would hurt Canadian export competitiveness.
It said it did not account for the full range of Trump's promised policy changes.
This is the bank's first economic update since Donald Trump won the US presidential election in November. Trump, who will become President on Friday, is widely expected to loosen US fiscal policy and if he proves serious about weakening the US Dollar, the BoC might be forced to react. Indeed, a rate cut in Canada to 0.25% remains a possibility. And it went a step further in the press release announcing the rate decision, warning recent dollar strength is "exacerbating ongoing competitiveness challenges".
However, risks remain and his trade policies will be clear only after he assumes office on January 20.
Those concerns deepened after Trump aide Sean Spicer said last week that Canada could face a border tax on automobile products.
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"In that context, especially with inflation being below target for a prolonged period, yes a rate cut remains on the table and it would remain on the table as long as those downside risks are still present".
Aubrey Basdeo, head of fixed income for BlackRock Canada, said there are so many variables that it's hard to analyze the impacts of a USA border adjustment tax and drop to its corporate tax rate.
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Poloz said the bank had yet to conduct internal assessments on the tax and trade ideas floating in the US due to a lack of information and the complex nature of such an analysis.
The loonie reached on Tuesday a almost three-month high at C$1.3019, helped by recent data that showed a surge in jobs in December and the first trade surplus in more than two years in November, while a Bank of Canada survey last week pointed to improving business conditions.
"Trump enters the Oval Office with a promise to Make America Great Again, but the trouble is that America is pretty good already", Mr. Shenfeld says. The two-year bond fell 2 Canadian cents to yield 0.788 percent and the 10-year declined 27 Canadian cents to yield 1.7 percent. "We forecast USD/CAD to fall to 1.31 by mid-2017 and 1.28 at end-2017".