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

Irving Hamilton
July 12, 2018

The central bank said it expects the Canadian economy to expand by 2 per cent per year on average between 2018 and 2020, noting that recently implemented tariffs on steel and aluminium will likely have only "modest" effects on growth and inflation.

As in April, the projection incorporates an estimate of the impact of trade uncertainty on Canadian investment and exports. The interest charged on this kind of debt typically goes up when the Bank raises its rate. This effect is now judged to be larger, given mounting trade tensions.

CPI and the Bank's core measures of inflation remain near 2 per cent, consistent with an economy operating close to capacity.

Canadian businesses must also contend with the uncertainty surrounding the hard renegotiation of the North American Free Trade Agreement, for which talks have stalled.

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Canada, which has its own trade dispute with the United States, exports many commodities and runs a current account deficit so its economy could also be hurt if the flow of trade or capital slows.

"I thought this was about as neutral a statement as you possibly can put into the marketplace given that you have hiked rates.We're pretty much in uncharted territory in the sense of we've never been this indebted, rates have never really been this low, and [Poloz] is trying to reverse the ship without turning the ship over". However, it intends to continue with its gradual, data-dependent approach.

As expected, the Bank of Canada raised its key lending rate on Wednesday, to 1.5 per cent, the fourth rate hike in roughly the past year. It also said underlying wage growth has been weaker than what would normally be expected in a tightened job market. CPI inflation is expected to edge up further to about 2.5 per cent before settling back to 2 per cent by the second half of 2019.

"There are worries ahead, growth hasn't been stellar, but the backdrop has been just good enough for the Bank of Canada to nudge rates a quarter point higher".

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