MNI INTERVIEW:Export Rebound Gives BOC Scant Reason To Cut-EDC

Canadian exports are rebounding to new records a year after the U.S. imposed major tariffs, and the unexpected strength erodes the case for lower central bank interest rates as oil prices rise again, the chief economist of the government's trade finance bank told MNI.

"There isn't as much urgency around a rate cut, and it allows the Bank to sort of let it ride for a little bit to see which of the two risks is most urgent to deal with," Export Development Canada's Stuart Bergman said, predicting the central bank will stay on hold until late next year. "We're seeing the same thing frankly in the United States as well with respect to the decisions of the Fed."

Governor Tiff Macklem on Wednesday held his key lending rate at 2.25% and dropped language about potential for consecutive hikes or a cut, returning to language about being able to hold. He later told reporters the risk of hikes remains if oil prices feed into broader inflation, while noting exporters are benefitting from a strong U.S. economy and adapting to trade uncertainty. 

"Exporters are figuring out ways to work around this new trade environment," Bergman said. "The Canadian economy is carrying a lot better than many people had feared." (See: MNI INTERVIEW: Resilience Keeps BOC On Hold- Ex Adviser Ragan)

GLOBAL RISK, CANADA REWARD

Canadian merchandise exports grew to a record CAD77 billion in May. The trade balance swung to a surplus of CAD4.2 billion from a deficit of CAD5.7 billion a year earlier. 

While gains are concentrated in energy and gold there are signs of overall improvement. Even excluding the jump in oil and gold prices export volumes have climbed this year, and the share of firms filling out paperwork to have a tariff exemption under USMCA has doubled to more than 80%, Bergman said. 

"There is enormous demand again for Canadian commodities," Bergman said, "given increased risk on the geopolitical risk side of things." Canadian leaders have also become motivated to develop the infrastructure needed to diversify exports to non-U.S. markets, he said. Non-U.S. exports rose 16% last year, he said.

Weakness among exporters hurt by U.S. tariffs is a prime reason some economists over the last year forecast a recession that would lead the Bank to cut rates. (See: MNI INTERVIEW: Canada Nowhere Near Recession- Ex BOC Adviser)

Economic output did shrink in the fourth quarter and stalled in the first quarter but the Bank lifted its second quarter forecast a full percentage point to 2.5% annualized. Bergman predicts Canada's  economy will grow 1% in 2026 and quicken to 2.1% in 2027, including gains in business investment as firms adjust to the tariff hit.

MEXICO MORE AT RISK?

U.S. President Donald Trump is unlikely to abandon USMCA according to Bergman. While many people believe the failure to meet a July 1 deadline for a full renewal of the deal means it's up for a substantial review, Bergman says the agreement specifies more limited technical talks.

"Strong U.S. congressional and business support for the agreement, in my view, makes a unilateral U.S. withdrawal less likely," Bergman said.

Areas of contention appear limited to areas mapped out in prior discussions, he said, such as agriculture, finance, and entertainment. Trump has complained about Canada's dairy quota system and pressured Canada to remove a "Netflix tax" aimed at funding local artists. 

Experts MNI has interviewed see little chance Prime Minister Mark Carney will succeed in removing major tariffs on steel, autos and aluminum. (See: MNI INTERVIEW: Carney-Trump Deal Will Include Tariffs-Chamber)

Canada may still do well compared with Mexico when it comes to Trump's desire to shield the U.S. from what he calls unfair competition from China, Bergman said. "It's been well documented that many U.S. imports from China, to the extent that they were closed off, were redirected through Mexico, and you can see it in the data," he said.

RPT-MNI INTERVIEW: Resilience Keeps BOC Hold- Ex Adviser Ragan

(Repeats story first published on July 17)

The Bank of Canada has good reason to keep interest rates on hold for a while because the economy is showing resilience to shocks from oil inflation and U.S. tariffs that helps moderate inflation and are outside the easy reach of monetary policy, former adviser Chris Ragan told MNI.

"There's been a bit of a surprise at how resilient the Canadian economy has been, even during this sort of weak time," said Ragan, a McGill University professor who has also served as a special adviser to Canada's finance department. 

"I think he wants to avoid getting pushed into really low rates again, from which he'd have to come back," Ragan said of Macklem's views. "He kind of wants to get to normal."

Canada's GDP stalled in the first quarter after shrinking in the fourth but Governor Tiff Macklem held the key rate at 2.25% Wednesday and boosted this second quarter growth call by a full percentage point to 2.5%. The Bank has a single mandate to keep inflation at 2% and its new forecast also showed things normalizing with headline price gains seen slowing from about 3% now back to target early next year.

KEEPING CREDIBILITY

"The Bank is basically at the low end of its suggested range for the neutral rate, so I think you've got a pretty good argument for Tiff to just say, yeah, we're just not going to do much," Ragan said. (See: MNI INTERVIEW: BOC Can Delay Hike To Neutral Til 2027-Mc Mahon)

“The oil prices are caused by a supply disruption in the Middle East, that's clearly not directly fixable by monetary policy, and I think a pretty good argument is that most of the Canadian weakness is caused by trade and tariff uncertainty, and that's not directly fixable by monetary policy,” Ragan said.

The latest rate decision dropped earlier signals about potential for either consecutive hikes or a cut, returning to an earlier view that the overnight rate is about right to rebalance the economy. The Governor later told reporters consecutive hikes could be needed if there is another bump in oil prices. 

“The Bank has to just keep enforcing that credibility, and you do that by saying, 'Okay, we're prepared to raise rates, you know, when we have to,'" Ragan said. Part of the reason price expectations have been contained so far is the long-run credibility officials won after painful past fights to curb excessive price growth, he said. 

MANDATE REVIEW

The Bank of Canada has a mandate review later this year and unlike Fed Chair Kevin Warsh's signals of a big overhaul Macklem this time has limited the scope of questions, citing a consensus about the job to be done. 

While the broad strokes are right Macklem needs to remove language added last time about seeking higher employment when the inflation mandate is set, Ragan said. The last five-year agreement was made in tandem former finance minister Chrystia Freeland and Ragan said that agreement had "some deep incoherence." 

One change Macklem has signaled is adding language about a world more prone to supply shocks, which Ragan said is worthwhile. 

“If it is true that we are in a world of greater frequency and maybe even a greater average size of supply shocks, then okay, monetary policy is going to be harder," Ragan said. "I don't think it's an argument for adding in stuff about maximum employment.”

Another looming shock is Prime Minister Mark Carney's plans to meet the NATO target where 5% of GDP is spent on defense, up from less than 2% in recent decades. Carney has said that will happen over the next decade. "We should absolutely expect that as this big fiscal expansion happens over the next few years, that will tend to push up interest rates higher than they would otherwise be," Ragan said. 

MNI PBOC WATCH: July LPR To Hold On Cheap Loans And Inflation

China's Loan Prime Rate is expected to remain unchanged in July as the People's Bank of China keeps policy rates on hold amid record-low borrowing costs and easing deflationary pressures.

The one-year LPR is expected to remain at 3.0% and the five-year rate at 3.5% on Monday, marking the 14th consecutive month without change. Both rates were last cut by 10 basis points in May 2025 after the PBOC lowered its seven-day reverse repo rate – its benchmark policy rate – by 10bp to 1.4% on May 8, followed by a 50bp cut in the reserve requirement ratio on May 15, largely to counter tariff-related shocks.

PBOC Deputy Governor Zou Lan told reporters on Wednesday that the weighted average interest rate on newly issued corporate loans fell to 3.0% in June, down 20bp from a year earlier and "already at a historical low," adding the central bank would adjust interest rate levels in line with economic conditions and price trends.

The decline in lending rates has compressed banks' net interest margins to a record low of 1.40% in the first quarter of 2026, putting further pressure on profitability as weak credit demand persists. Banking sector net profit fell 3.73% y/y in Q1, with smaller lenders suffering the sharpest declines.

Advisors told MNI that while China's rapidly expanding high-tech industries are primarily served by large banks, small and mid-sized lenders, which remain heavily exposed to stagnating sectors, are struggling with rising non-performing loans and weak credit demand. (See MNI: China's Small Banks Hit As Old Economic Sectors Struggle) 

Authorities are expected to accelerate consolidation, recapitalisations and, where necessary, the resolution of small and mid-sized lenders, Song Ke, deputy director of the China Banking Research Center at Renmin University of China, told MNI. Regulators have also curbed high-yield deposits and moderated the pace of policy rate cuts to limit further compression of banks' net interest margins, added Li Keying, senior analyst at Orient Golden Credit Rating International.

RISING INFLATION

According to analysts' calculations based on the latest National Bureau of Statistics data, the GDP deflator rose 1.6% y/y in the second quarter, ending 12 consecutive quarters of negative readings. The GDP deflator measures price changes across all final goods and services produced in the economy and is a broader gauge of inflation than the producer and consumer price indexes. The turnaround was driven mainly by higher crude oil and commodity prices amid geopolitical tensions in the Middle East, lifting producer costs and contributing to a notable rebound in producer prices.

However, Zhang Ming, deputy director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, argued that the PBOC should not slow the pace of monetary easing because of an oil-driven rise in inflation while domestic demand remains weak, adding that inflation is likely to ease again in the second half without additional stimulus. (See MNI INTERVIEW: China Likely To Announce New Fiscal Stimulus)

Some advisors argued that quantitative easing should be considered as conventional monetary policy becomes less effective, given banks' already compressed net interest margins. Zhu Tian, vice president of CEIBS, proposed that the central government issue CNY8 trillion of treasury bonds to support consumption and stabilise the property sector. The PBOC could then purchase the bonds in the secondary market through commercial banks, he said.

MNI POLICY: BOJ Sees Resilient Spending Able To Weather Hike

The Bank of Japan believes private consumption has remained resilient despite rising goods and services prices, supported by household savings and front-loaded spending, suggesting any subsequent slowdown is likely to be limited and unlikely to derail its gradual rate-hike path, MNI understands.

Increasing purchases of durable goods, particularly air conditioners, alongside non-durable daily necessities have lifted overall consumption, according to government and BOJ data.

But Bank officials have confirmed through anecdotal evidence and other information that front-loaded demand has also boosted recent consumer spending, complicating efforts to gauge the underlying strength of household consumption. Unlike the surge in spending ahead of previous consumption tax hikes, however, the latest bout of front-loaded demand appears relatively modest and officials are closely monitoring when and to what extent the subsequent pullback will weigh on private consumption as they assess the economy's ability to withstand further interest-rate hikes.

MNI reported this week that the Bank would prefer to gauge inflation expectations in the September Tankan, due Oct. 1, before raising rates again, unless a sharp weakening of the yen prompts earlier action. (See MNI POLICY: BOJ To Eye Expectations Ahead Of Additional Hike)

PASS THROUGH

Officials expect consumer inflation to accelerate as firms pass higher costs on to consumers from around July onward, weighing further on real wages and eroding households' purchasing power.

The pass-through of higher costs is occurring more quickly than in previous inflation cycles, while the weaker yen is exerting a greater upward influence on prices, prompting the BOJ to remain vigilant over inflation risks and their potential impact on household spending.

Although real wages have remained positive, officials expect real-wage growth to slow and potentially turn negative, putting renewed downward pressure on private consumption. Inflation-adjusted real wages, a key gauge of households' purchasing power, rose 1.4% y/y in May after increasing 2.0% in April, marking a fifth consecutive monthly gain, government data showed.

MNI POLICY: BOJ To Eye Expectations Ahead Of Additional Hike

The Bank of Japan believes it has time to assess the impact of June's rate increase on economic activity and financial conditions while monitoring whether corporate inflation expectations continue to strengthen, making the period after the September Tankan survey, due Oct. 1, the more likely opportunity for another rate hike, provided the yen remains broadly stable, MNI understands.

Officials judge the risk of underlying CPI overshooting its 2% target has not increased significantly despite firms reporting stronger inflation expectations, allowing policymakers to avoid rushing into another rate hike, following June's 25 basis point increase to 1%. (See MNI BOJ WATCH: Uchida Flags More Hikes; No Timing Hint)

June's Tankan showed companies expected consumer prices to rise 2.7% annually, up from 2.6% in March. They also projected inflation of 2.6% three years ahead and 2.6% five years ahead, both up from 2.5%. The BOJ views this increase as consistent with the moderate upward trend anticipated in its April Outlook Report, and does not view this gradual rise accelerating at a pace that would prompt immediate policy action.

Officials attribute part of the increase in inflation expectations to higher crude oil prices and want to confirm whether those expectations remain elevated when updated within the September Tankan, following the subsequent decline in oil prices.

However, should fresh risks emerge, such as a further weakening of the yen, pressure would increase on the BOJ to raise the policy rate before completing its assessment. (See MNI POLICY: Weak Yen Adds Risk To BOJ's Policy Direction)

OIL PRICE VOLATILITY

Although crude oil prices rebounded following renewed tensions in the Middle East, they remain below levels prevailing at the time of the June meeting, when policymakers discussed considerable upside risks to prices. Officials therefore want to determine whether the rise in corporate inflation expectations proves durable or reflects a temporary shock.

The BOJ expects the pass-through of higher business costs seen in recent months to feed into consumer prices with a lag, although the extent to which firms can fully pass on costs remains uncertain. Progress in securing alternative sources of raw materials previously dependent on Middle Eastern supplies has reduced downside risks to the economy.

However, diversifying supply chains has increased corporate costs, adding pressure on firms to raise selling prices and potentially sustaining inflationary pressures, partly offsetting the disinflationary effect of lower crude oil prices. 

While median forecasts for core CPI and core-core CPI in fiscal 2026 could be revised slightly higher from the April projections of 2.8% and 2.6%, any upward revision is unlikely to alter the BOJ's assessment of underlying inflation materially or trigger an imminent rate hike.

MNI INTERVIEW: Resilience Keeps BOC On Hold- Ex Adviser Ragan

The Bank of Canada has good reason to keep interest rates on hold for a while because the economy is showing resilience to shocks from oil inflation and U.S. tariffs that helps moderate inflation and are outside the easy reach of monetary policy, former adviser Chris Ragan told MNI.

"There's been a bit of a surprise at how resilient the Canadian economy has been, even during this sort of weak time," said Ragan, a McGill University professor who has also served as a special adviser to Canada's finance department. 

"I think he wants to avoid getting pushed into really low rates again, from which he'd have to come back," Ragan said of Macklem's views. "He kind of wants to get to normal."

Canada's GDP stalled in the first quarter after shrinking in the fourth but Governor Tiff Macklem held the key rate at 2.25% Wednesday and boosted this second quarter growth call by a full percentage point to 2.5%. The Bank has a single mandate to keep inflation at 2% and its new forecast also showed things normalizing with headline price gains seen slowing from about 3% now back to target early next year.

KEEPING CREDIBILITY

"The Bank is basically at the low end of its suggested range for the neutral rate, so I think you've got a pretty good argument for Tiff to just say, yeah, we're just not going to do much," Ragan said. (See: MNI INTERVIEW: BOC Can Delay Hike To Neutral Til 2027-Mc Mahon)

“The oil prices are caused by a supply disruption in the Middle East, that's clearly not directly fixable by monetary policy, and I think a pretty good argument is that most of the Canadian weakness is caused by trade and tariff uncertainty, and that's not directly fixable by monetary policy,” Ragan said.

The latest rate decision dropped earlier signals about potential for either consecutive hikes or a cut, returning to an earlier view that the overnight rate is about right to rebalance the economy. The Governor later told reporters consecutive hikes could be needed if there is another bump in oil prices. 

“The Bank has to just keep enforcing that credibility, and you do that by saying, 'Okay, we're prepared to raise rates, you know, when we have to,'" Ragan said. Part of the reason price expectations have been contained so far is the long-run credibility officials won after painful past fights to curb excessive price growth, he said. 

MANDATE REVIEW

The Bank of Canada has a mandate review later this year and unlike Fed Chair Kevin Warsh's signals of a big overhaul Macklem this time has limited the scope of questions, citing a consensus about the job to be done. 

While the broad strokes are right Macklem needs to remove language added last time about seeking higher employment when the inflation mandate is set, Ragan said. The last five-year agreement was made in tandem former finance minister Chrystia Freeland and Ragan said that agreement had "some deep incoherence." 

One change Macklem has signaled is adding language about a world more prone to supply shocks, which Ragan said is worthwhile. 

“If it is true that we are in a world of greater frequency and maybe even a greater average size of supply shocks, then okay, monetary policy is going to be harder," Ragan said. "I don't think it's an argument for adding in stuff about maximum employment.”

Another looming shock is Prime Minister Mark Carney's plans to meet the NATO target where 5% of GDP is spent on defense, up from less than 2% in recent decades. Carney has said that will happen over the next decade. "We should absolutely expect that as this big fiscal expansion happens over the next few years, that will tend to push up interest rates higher than they would otherwise be," Ragan said. 

MNI INTERVIEW: UK TLFS Timeline Update In August - ONS Benford

The UK Office for National Statistics has made progress improving its surveys and economic data, but there is still work to do, not least putting quality of output ahead of quantity, a senior official told MNI on Wednesday.

Since April, the ONS has "focused on the areas that matter most for the quality and trustworthiness of our statistics," James Benford, Director General, Surveys and Economic Statistics said in an interview.

But the main priority remains progressing the Transformed Labour Force Survey (TLFS) to become the main headline measure for labour market statistics at some point in 2027, said Benford, who also serves as the Deputy National Statistician, adding that a readiness assessment would soon be completed.

"We will set out an indicative timeline in August for how things proceed from here on the TLFS. It's a complex journey, but we will show set out the timeline," he said, with a "final go/no go type decision in 2027 on that timeline".

DATA CONCERNS

The quality of UK labour data has been widely questioned for some years now, with policymakers and legislators all unhappy with its reliability, and the ONS announced the introduction of the new TLFS in 2023. (see MNI INTERVIEW: UK Labour Force Survey Now Improved )

Benford, who was hired from the Bank of England, where he held a senior role as Chief Data Officer, noted that the update on wider ONS improvements published on Wednesday went into little detail on the labour data changes, as there would be a bigger window in August.

"We're doing the ready testing now, and that's a process that involves our users and a stakeholder panel, and it then passes to the (Executive Committee) at the ONS, and then it goes to the UKSA board and then we publish [in August]," he said.

"Survey changes have had the desired effects and the response rates have risen -- pretty much risen in line with what we've been targeting operationally, so that's really encouraging," he noted.

INPUT DATA ERRORS

Following ONS errors in recent years that were a direct result of erroneous data collected by other other official agencies, Benford said there has been a collaborative exercise across government to tighten up output. 

The ONS "sits across many different data sets and has a key role drawing people together across the system. This has been collaborative exercise, making sure the right checks and balances are there," Benford said. 

"There's a lot that we can do, and we'll be bringing all of that work to the UK Statistics Authority Board, probably in September," he added.