The Bank of Canada's below-neutral policy rate remains appropriate due to heightened uncertainty over U.S. trade policies, Deputy Governor Timothy Lane said.
In a speech a day after the central bank stood pat on its rates, Lane said "considerable uncertainty" is surrounding the global outlook amid geopolitical developments and increasing protectionism.
Lane cited the ongoing talks on the North American Free Trade Agreement, or NAFTA, and the new U.S. tariffs on steel and aluminum imports, which he said have "potentially serious consequences."
"We do not know how or when the NAFTA talks or other trade disputes will conclude, and we do not know how industries, or governments, will react. The range of possibilities is wide, which means that trying to quantify any scenario in advance would not be useful for monetary policy purposes," Lane said.
"But even with no changes in our trading arrangements, the uncertainty around them is affecting business investment decisions," Lane noted, adding that the new U.S. tax law may also lead to a decline in investments in Canada.
The central bank's policy rate also remains appropriately below neutral as competitive challenges facing Canadian exports and the country's high household debt levels are weighing on demand, Lane said.
The bank maintained its target for the overnight rate at 1.25% and kept the bank rate and deposit rate unchanged at 1.5% and 1.0%, respectively.
Lane echoed the bank's statement that some continued monetary policy accommodation might be needed to keep the economy operating close to potential and inflation on target.
