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Bank of Canada governor Tiff Macklem warns the implementation of tariffs on Mexico and Canada will damage the long-term success of the Canadian and Mexican economies and this will lead to tough choices for central banks.

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“If significant broad-based tariffs are indeed imposed, they will test the resilience of our economies in the short run and reduce long-run prosperity,” said Macklem, during remarks at an event hosted by the Bank for International Settlements in Mexico City on Thursday. “Tariffs mean economies work less efficiently. There will be less investment and lower productivity. That means our countries will produce less and earn less.”

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On Feb. 1, United States President Donald Trump signed executive orders slapping a 25-per-cent tariff on Canadian and Mexican goods and a 10 per-cent tariff on Canadian energy. On Monday, both the Canadian and Mexican governments reached a deal with the Trump administration, giving each a country a 30-day pause on the tariffs.

Macklem added that monetary policy cannot fully offset the impacts of tariffs and instead will have to strike a balance, weighing the downward pressure on inflation from weaker economic activity against the upward pressures from supply chain disruptions and higher input prices.

“In a world with more structural change and more negative supply shocks, central banks will be faced with harder choices,” he said. “And harder choices bring risks of public disappointment and frustration.”

“And some will challenge our independence,” he added.

In order to address these challenges, Macklem laid out a number of priorities central banks should focus on. First, he says central banks should be humble about what they don’t know, but confident in frameworks that do work.

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“We didn’t get everything right through the pandemic. And elevated inflation and higher interest rates have been difficult for our citizens,” he said. “But in Canada, as in many other countries, inflation has come down. And we restored low inflation without causing a recession or major job losses.”

Second, there must be clarity on what monetary policy can and cannot do, with Macklem adding “we need to avoid the temptation to overload monetary policy by expecting more of it than it can deliver.”

Third, there is a need to invest in “richer information” on the supply side of the economy and look at economies through different lenses. Fourth, central banks must work together internationally to confront challenges.

Lastly, central banks must remain free of political influence and remain open, accountable and transparent.

“The world is a tougher place today than it was a few short years ago,” said Macklem. “And facing the headwinds before us will not be easy. But that’s why we have independent central banks — we are designed for tough times.”

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