Central Banks Warn U.S. Tariffs Raise Inflation, Threaten Canada Mortgage Arrears and Fed's 4.25–4.5% Rate
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Central banks in North America and Europe are warning of increased risks to economic growth and financial stability due to recent U.S. trade policies, particularly the imposition of tariffs under the Trump administration.
The Bank of Canada, in its 2025 Financial Stability Report, highlighted that the ongoing trade war with the United States poses the greatest threat to the Canadian economy, warning of potential market dysfunction and increased volatility. The report notes that a severe and prolonged trade war could push mortgage arrears in Canada beyond levels seen during the 2008-09 financial crisis. The household debt-to-income ratio in Canada has declined from 179% to 173%, but financial stress has increased among households without a mortgage, with arrears on auto loans and credit cards now above historic levels. About 60% of Canadian mortgages are set to renew in 2025 or 2026, with most facing payment increases, though these are expected to be smaller than previously anticipated.
Bank of Canada officials also raised concerns about the growing presence of hedge funds in the Canadian government bond market, which could introduce added volatility during periods of stress. Canadian banks are considered well-capitalized and have increased their capital buffers and provisions for credit losses, but a sharp downturn could prompt them to reduce lending if losses rise.
In the United States, Federal Reserve officials including Governor Michael Barr, Governor Adriana Kugler, and New York Fed President John Williams have warned that tariffs are likely to result in higher inflation, elevated unemployment, and slower economic growth starting later this year. Barr noted that the Fed could face a difficult policy environment if both inflation and unemployment rise, while Williams indicated that growth is expected to slow considerably. The Fed's current policy rate is in the 4.25% to 4.5% range, described as moderately restrictive.
Fed officials emphasized that the full impact of tariffs remains uncertain, with some evidence of 'front loading' by businesses and consumers ahead of tariff implementation in the first quarter. The U.S. labor market remains stable and close to maximum employment for now, and monetary policy is currently described as moderately restrictive. The Fed has adopted a 'wait and see' approach regarding future rate changes.
Bank of England officials also commented that tariffs are expected to weigh on economic activity and inflation, but stated that the Monetary Policy Committee remains prepared to act to achieve its 2% inflation target.
The Bank of Canada said that U.S. trade policy under the Trump administration has “sharply reduced prospects for global economic growth.”
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