May 31, 2018 / 4:48 PM / in 23 days

UPDATE 2-Bank of Canada's Leduc: too early to tell U.S. tariff impact

(Recasts with comments from news conference, adds economist comment)

By Allison Lampert

QUEBEC CITY, Quebec, May 31 (Reuters) - It is too early to tell what impact U.S. tariffs on steel and aluminum imports will have on the Canadian economy and central bank policymakers will have to watch how the data shape up in the coming months, a Bank of Canada official said on Thursday.

While the bank has highlighted the risk of protectionism and tit-for-tat responses in the past, it will continue to be guided by the numbers in its interest rate decisions, said Bank of Canada Deputy Governor Sylvain Leduc.

Leduc’s comments followed a speech in which he repeated some of the messages from the central bank’s interest rate decision on Wednesday, including that it expects higher rates will be needed to keep inflation near target.

Leduc also noted that while uncertainty is everywhere and comes from many sources, monetary policy decisions must always be forward looking.

“We’re operating in this environment and although it’s uncertain I think we’ll do what’s right given the data,” Leduc said during a news conference. “If the economy warrants a rate increase, we will take that into account.”

After three rate increases since July 2017, expectations have risen that the bank will hike again at its next meeting this July.

Policymakers were not pre-judging what they will do in July, Leduc said.

Still, he painted a relatively positive picture of the Canadian economy, saying the tenor of recent data has improved and wage growth was getting closer to what would be expected for an economy operating at potential.

Leduc said in making Wednesday’s rate decision, policymakers weighed an economy that is growing largely as expected against elevated trade policy uncertainty that is restraining business investment.

While the uncertainty Canada faces on many fronts makes rate decisions less straight forward, Leduc said that consumers and businesses continue to make decisions regardless, as does the Bank of Canada.

“Monetary policy decisions are always made with an imperfect picture of the future and they must be forward looking, always with our mandate - the inflation target - in mind,” Leduc said in the speech.

Leduc’s comments highlight the bank’s view that policymakers cannot be paralyzed by uncertainty and firms the odds of a rate hike in July, said Josh Nye, economist at Royal Bank of Canada.

“I don’t think they would be saying this if they were really concerned about these tariffs sparking a broader trade war,” Nye said.

Reporting by Allison Lampert Writing by Leah Schnurr and Dale Smith Editing by Chris Reese and Lisa Shumaker

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