05:24 PM EST, 02/06/2025 (MT Newswires) -- In a virtual speech entitled 'Structural change, supply shocks and hard choices', Bank of Canada Governor, Tiff Macklem, on Thursday said: "As 2025 begins, we are facing new uncertainty with a shift in policy direction in the United States. President Donald Trump's threats of new tariffs are already affecting business and household confidence, particularly in Canada and Mexico. The longer this uncertainty persists, the more it will weigh on economic activity in our countries.

"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. Tariffs mean economies work less efficiently. There will be less investment and lower productivity. That means our countries will produce less and earn less. Monetary policy can't change that.

"What monetary policy can do is help with the short-run adjustment. But even here, monetary policy has to strike a balance. Significant, broad-based tariffs will sharply reduce demand for our exports. At the same time, a weaker exchange rate, retaliatory tariffs and supply chain disruptions will raise import prices, putting upward pressure on inflation.

"With a single instrument, our policy interest rate-, entral banks can't lean against weaker output and higher inflation at the same time. So we will need to carefully assess the downward pressure on inflation from weaker economic activity, and weigh that against the upward pressures from higher input prices and supply chain disruptions.

"Other structural headwinds pose similar challenges for monetary policy. They'll impact both demand and supply, slowing growth while adding cost. Monetary policy cannot address these headwinds directly or offset their economic consequences.

"In a world with more structural change and more negative supply shocks, central banks will be faced with harder choices. And harder choices bring risks of public disappointment and frustration. We will face criticism about our decisions -- and about how well monetary policy is seen to have worked when confronted with forces that are mostly out of our hands. We will be called ineffective or criticized for not doing enough. And some will challenge our independence."

So, Macklem asked in his speech, what can all of us do?

"First, we can be humble about what we don't know, but also confident in the effectiveness of our frameworks. We didn't get everything right through the pandemic. And elevated inflation and higher interest rates have been difficult for our citizens. 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.

"Guided by our frameworks, we can maintain confidence in price stability.

"Second, we can be just as clear about what monetary policy cannot do. There will always be forces beyond our influence, and while we need to understand those forces, we should also be clear that understanding is not the same as controlling. And we need to avoid the temptation to overload monetary policy by expecting more of it than it can deliver.

"Third, we can recognize that the world has changed. Structural headwinds and supply shocks require different types of information and analysis. This means investing in richer information about the supply side of the economy and building models that can analyze sectoral shocks and their transmission. It means reaching out and listening to households and businesses. It means looking at our economies through different lenses, regularly challenging our assumptions, and using scenarios to help manage uncertainty.

"Fourth, let's acknowledge that working together has never been easy and it's getting harder. But let's also remember that it's important. We are more effective if we confront our shared challenges together. The shared resolve of central banks to fight the post-pandemic surge in inflation helped all of us bring inflation down. This was a positive international spillover and, together, we can generate other positive international spillovers.

"Finally, we need to remain evidence-based, technocratic and professional, and free of political influence. We need to be open, accountable and transparent. And we need to be learning institutions -- when faced with valid criticism, we should critically evaluate our policy actions and be willing to improve. Being independent and accountable and continuously learning is how we build trust.

"The world is a tougher place today than it was a few short years ago. 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."