Canada's trading arrangement with the United States may still be subject to more than minor tweaks, according to economists polled by Reuters who said the Bank of Canada will remain cautious and keep policy on hold well into next year.
After assuring Prime Minister Justin Trudeau in February the North American Free Trade Agreement (NAFTA) only needed "tweaking," President Donald Trump has since accused Canada's dairy industry of protectionism, and has proposed a border tax that has unnerved Canadian policymakers.
The United States has since also imposed duties on Canadian softwood lumber, reviving a trade dispute that first started more than 30 years ago.
When Reuters surveyed the same panel of economists shortly after the February meeting between Trump and Trudeau, they were not concerned there would be any major changes to NAFTA.
But in a new poll conducted May 12-16, they were, and said this could deal a material hit to Canada's economy, which sends over 75 percent of its exports south of the border.
"Concerns on the trade front, particularly after the lumber issue, will likely keep the Bank of Canada on hold at least through this year as it judges how the Canadian economy performs," said Nick Exarhos, economist at CIBC Capital Markets.
"If we were to lose free market access in large parts of the U.S., that would be pretty disastrous for our exports and also for business investment in the Canadian economy," he added.
Taken with uncertainty over what impact the latest government moves will have on a red-hot urban housing market, along with recent problems at mortgage lender Home Capital Group Inc, the central bank seems likely to hold rates where they are for about another year.
Although the Bank of Canada recently raised its economic growth outlook for 2017, the consensus view in the latest poll was for rates to remain at 0.50 percent until the second quarter of next year, versus the first quarter in a poll a month ago. Rates are then expected to rise by 25 basis points.
Forecasts in Reuters polls have vacillated between the first, second and third quarters for the past six months.
Analysts in the poll gave only a median 15 percent probability the next move would be a rate cut. The Bank reduced rates twice in 2015 but has held them steady since.
MORTGAGE MARKET IN FOCUS
Markets will also look to next week's policy statement for any comment on the mortgage market after Bank of Canada Governor Stephen Poloz told a newspaper over the weekend the problems at non-bank lender Home Capital are contained.
Depositors have withdrawn more than 90 percent of funds from Home Capital's high interest savings accounts since March 27, when the company terminated the employment of former Chief Executive Martin Reid.
Withdrawals accelerated after April 19, when Canada's biggest securities regulator, the Ontario Securities Commission, accused Home Capital of making misleading statements to investors about its mortgage underwriting business. The company has said the accusations are without merit.
Last year, the federal government tightened mortgage regulations to try and prevent Canadians from taking on too much debt, while the Ontario government last month unveiled a suite of measures, including a foreign buyers tax, aimed at cooling the market in Toronto, Canada's largest city.
A decline in Toronto home sales in April gave an early sign the market is cooling, but economists are uncertain how long and how deep a slowdown will be.
"The Bank will have to do something about the bubbly housing market if the new macro-prudential measures don't work as well in taking some steam out of it," said Krishen Rangasamy, senior economist at National Bank of Canada. "The Bank will eventually change its tone in the second half of the year. In other words - prepare markets for a rate hike."
Canada's household debt-to-income ratio stood at a record 167.3 percent in the fourth quarter, much of it made up of a mortgage debt chasing record high house prices.
(Polling by Kailash Bathija; Editing by Ross Finley and Andrea Ricci)