With the fate of the North American Free Trade Agreement (NAFTA) still up in the air, Bank of Canada (BoC) believes the situation is weighing down on business investment.
In a Reuters report, BoC deputy governor Lawrence Schembri said it has kept interest rates low due to the drag in business investment resulting from NAFTA uncertainties. Schembri said concerns about the trade deal have affected investment and exports.
"That’s part of the reason why we believe that the economy is operating close to potential, inflation is less than (or) close to our target of 2%, yet monetary policy is below the neutral rate, in part because we have to lean against the drag coming from the uncertainty created by NAFTA," Schembri said.
The central bank has been attributing the sluggish business investment on the NAFTA deal. Given that 75% of Canadian exports go to the United State, the bank fears that any change in the trade agreement might jeopardize supply chains and profitability of Canadian firms.
The bank pledged to take a cautious stance in introducing another rate hike this year, given the said situation and the record levels of Canadian households.
Financial Times reported that US President Donald Trump's efforts to renegotiate the deal may likely drag into next year after being unable to present a revised deal to legislators.
“The NAFTA countries are nowhere near close to a deal. We, of course, will continue to engage in negotiations, and I look forward to working with my counterparts to secure the best possible deal for American farmers, ranchers, workers and businesses," US trade representative Robert Lighthizer told the Financial Times.
In a separate report on Reuters, Canadian Prime Minister Justin Trudeau expressed optimism about the deal, saying that a new agreement could be established by the end of the month.
"It's right down to the last conversations ... I'm feeling positive about this, but it won't be done until it's done and people are working very, very hard on it right now," Trudeau said.
He added: “We've worked with them (the Americans) on a whole bunch of issues, including this morning in Washington where we have some of our top folks continuing the conversations. To be honest, we are down to a point where there is a good deal on the table.”