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The inauguration of President Donald Trump exactly one year ago today has had wide reaching impact across the world. Think the Canadian housing market might have escaped the reach of ‘The Trump Effect?’ Think again — the president’s increasingly unclear thoughts on NAFTA could have serious consequences for Canadian real estate in 2018.

This week, the Bank of Canada hiked the overnight rate by 25 basis points to 1.25 per cent. While the move came after a quarter of incredibly strong job numbers, Bank of Canada Governor Stephen Poloz warned that the uncertainty surrounding NAFTA negotiations could affect the Bank’s decision to adjust rates moving forward.

“[Businesses who responded to our Business Outlook Survey] are ‘increasingly concerned’ about rising protectionism and NAFTA prospects,” Poloz wrote in a statement. “We can sympathize with those doubts. Our own outlook assumes that, at a minimum, the US puts Canada on notice of its intention to pull out of NAFTA in the months ahead.”

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Canada’s central bank has forecasted that the ongoing negotiations, and their potential demise, could negatively impact the country’s economy by 0.5 per cent over the next two years.

A higher overnight rate influences lenders to hike mortgages, leading to larger monthly payments for homeowners. In December, may economists were predicting three rate hikes in 2018, but if NAFTA talks fall apart, that could cause the Bank to rethink further increases.

“A breakdown of talks would likely lead to a more cautious approach from the Bank of Canada [when it comes to interest rate hikes],” writes RBC chief economist Dawn Desjardins, in a recent note.

According to CIBC senior economist Avery Shenfeld, even the concept of NAFTA being axed is enough to affect the Bank’s decision to hike rates again later in the year.

“While the Bank isn’t ready to assume that NAFTA will be completely cancelled, doubts on that front can impact business sentiment…That creates a little less room for the additional drag of higher interest rates on the domestic economy,” he writes in a note.

Not every economist thinks that the Bank of Canada should be so focused on NAFTA. In fact, Scotiabank VP and head of capital market economics Derek Holt can’t seem to understand why Poloz is being so negative about the subject.

“The news of NAFTA has actually improved of late…and businesses are not indicating any impact on investment plans, but BoC increased its negative judgement on model growth forecasts by assuming it knows better than companies devising said investment plans?” he writes in a recent note.

So what does all this Trump and NAFTA talk mean for interest rates (and mortgage rates) in 2018? Shenfeld forecasts one further hike in the third quarter.

“We’re looking for one further hike this year, likely early in Q3, and a further 50 [basis points] in 2019,” he writes. “Yes, we’re facing higher rates, but not SO fast given other risks to growth ahead.”

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