(Adds comment from speech)
VANCOUVER, March 8 (Reuters) - U.S. plans for steel and aluminum tariffs amid rising protectionist rhetoric "carry potentially serious consequences" and will dampen business investment, but it is too early to know how monetary policy should react, the Bank of Canada said on Thursday.
In a speech highlighting the chilling effect of the "considerable uncertainty" surrounding the global outlook, Bank of Canada Deputy Governor Tim Lane said while the Canadian economy is progressing much as policymakers thought it would, it is appropriate that interest rates remain below neutral.
"We do not know how or when the NAFTA talks or other trade disputes will conclude, and we do not know how industries, or governments, will react. The range of possibilities is wide, which mean that trying to quantify any scenario in advance would not be useful for monetary policy," Lane said in a prepared speech to the Greater Vancouver Board of Trade.
The speech comes a day after the Bank of Canada held rates steady, as expected, and amid anticipation that U.S. President Donald Trump will outline global steel and aluminum tariffs but exempt Canada and Mexico -- at least for now.
Having raised rates three times, the bank was now assessing four key issues, Lane said: whether rising labor force participation and investment could create more capacity; whether inflation dynamics could be changing in the new economy; why wage growth has been slower than expected; and how high household debt could change the impact of rate hikes.
In moving gradually, the bank is trying to balance the risk of undermining economic growth by moving too quickly with the risk of waiting too long and needing to hike rates sharply to rein in inflation, Lane said.
He said accommodative monetary policy is working to offset several factors weighing on demand, including "persistent competitiveness challenges facing Canadian exports, the chilling effect of heightened uncertainty about future U.S. trade policies, and the burden of high household debt levels."
On the upside, Lane said last week's strong investment figures are encouraging, and the bank has greater confidence that inflation will remain sustainably near its 2-percent target.
He also said the U.S. economy still had upside potential, with the possibility that "animal spirits" could drive even faster growth than expected.
Lane said the bank is closely watching how sensitive consumption is to higher rates, noting that the deceleration in household credit growth "is what one would expect to see." (Additional reporting by Andrea Hopkins and David Ljunggren in Ottawa; Editing by Sandra Maler)