(Adds economist comment, market reaction)
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 that while the Canadian economy was progressing much as policymakers thought it would, it was 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, a day after the Bank of Canada held rates steady, reinforced the central bank's dovish message, and financial markets had little reaction, overshadowed by an announcement by U.S. President Trump to push ahead with the imposition of tariffs on steel and aluminum imports but exempt Canada and Mexico.
"Lane reinforced the cautious tilt in stating that easy policy is still needed to offset current challenges meaning that some accommodation is necessary to keep the economy on track. He also mentioned that, despite progress, the Bank still sees some signs of labour market slack," CIBC Economics economist Royce Mendes wrote in a note to clients.
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 was 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." (Additional reporting by Andrea Hopkins and David Ljunggren in Ottawa; Editing by Sandra Maler and Peter Cooney)