Tuesday, 16 October, 2018

Bank of Canada Hikes Interest Rate to 1.50%, CAD Climbs in Response

Russell Knight | 12 July, 2018, 03:42

TD senior economist Brian DePratto wrote in a note to clients Wednesday that the messaging is consistent with a central bank that's "committed to a rate hike cycle, but leaves sufficient room to adjust to evolving events".

Higher inflation figures are a signal Poloz has a green light to hike the rate, but trade developments since the central bank's last meeting - including stalled NAFTA talks and a possible trade war between the USA and China - will be enough to give Poloz pause, the National Bank of Canada wrote in a recent note.

In a statement, the BOC said it expects the global economy to grow by about 3.75% this year, and by and 3.5% next year. Meanwhile, oil prices have risen. The economy's growth projection for this year remains at 2%, the bank said.

"Canada's economy continues to operate close to its capacity and the composition of growth is shifting", said the BOC.

At the same time, household spending will represent a smaller and smaller share of overall growth due to the dampening effects of higher interest rates and stricter mortgage rules, it said. The possibility of more trade protectionism is the most important threat to global prospects. The increase also comes as the Bank looks to fight rising inflation which has risen above its 2 per cent target. Recent data suggest housing markets are beginning to stabilize following a weak start to 2018. Business investment is growing in response to solid demand growth and capacity pressures, although trade tensions are weighing on investment in some sectors. It's expected to settle back down to 2% in the second half of 2019.

The job market has improved as the country added 32,000 jobs in June.

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As in April, the projection incorporates an estimate of the impact of trade uncertainty on Canadian investment and exports.

Poloz also argued it should be clear that interest rate adjustments are "ill-suited" to counteract all the effects of protectionist measures, given how these trade actions affect multiple areas of the economy.

Another hike this week would come with Canada facing a number of trade-related uncertainties, including NAFTA talks, USA steel and aluminum tariffs and the threat of more duties on the economically critical automotive sector.

"Although there will be hard adjustments for some industries and their workers, the effect of these measures on Canadian growth and inflation is expected to be modest", the bank said in a statement.

But while expectations are high that Poloz will raise the rate this week, a smaller group of experts believes the ongoing trade uncertainty will be enough to keep the bank in a holding pattern for now. However, it intends to continue with its gradual, data-dependent approach.

The next scheduled date for announcing the overnight rate target is September 5, 2018.

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