Canada’s central bank raised its monetary policy rate by another 25 basis points to 1.50 percent and expects further rate hikes will be needed to keep inflation near its target though it will continue to be guided by the level of economic activity and inflation.
The Bank of Canada (BOC) has now raised its key rate, the target for the overnight rate, four times and by a total of 100 basis points in the last 12 months.
“Governing council expects that higher interest rates will be warranted to keep inflation near target and will continue to take a gradual approach, guided by incoming data,” the BOC said, confirming financial markets’ expectations that interest rates in Canada will continue to rise.
It is the BOC’s second rate hike this year and was expected by most economists following the central bank’s guidance in May in which it said economic data had reinforced the governing council’s view that “higher interest rates will be warranted to keep inflation near target.”
Today’s rate hike comes against a backdrop of growing volatility in global financial markets in response to concern over United States trade protectionism, including an increase in tariffs between Canada and the U.S., and negotiations over the North American Free Trade Agreement (NAFTA) that original went into effect in 1994.
In the July monetary policy report, the BOC estimated that uncertainty over future trading relationships and U.S. trade actions already implemented will subtract about 0.67 percent from Canada’s Gross Domestic Product by the end of 2020, an amount BOC described as “modest.”
U.S. tariffs on steel and aluminum imposed on June 1 is estimated to reduce Canadian exports by C$3.6 billion, or 0.6 percent, and mostly be felt in the second half of this year.
The impact of Canada’s countermeasures are expected to reduce imports by C$3.9 billion, or 0.6 percent, by raising the cost of users of steel, aluminum and iron, temporarily boosting inflation by about 0.1 percentage point until the third quarter of 2019.
Tensions and uncertainty over trade are taking place against still-solid global growth that has boosted oil prices and stronger-than-expected U.S. growth that has weakened the Canadian dollar while the economy is operating close to capacity.
The BOC raised its forecast for Canada’s economic growth in 2019 to 2.2 percent from April’s forecast of 2.1 percent and the 2020 forecast to 1.9 percent from 1.8 percent.
The forecast for growth this year was left at 2.0 percent, down from 3.0 percent in 2017, with the composition of growth shifting away from household spending towards business investment and exports as households adjust to higher interest rates and tighter mortgage regulations.
Inflation is seen remaining close to the bank’s target of 2.0 percent though it will accelerate to 2.5 percent in the third and fourth quarters of this year and average 2.4 percent for the year. It will then ease in 2019 but still average 2.2 percent and then 2.1 percent in 2020.
The Canadian dollar briefly rose on BOC’s rate hike but then eased to trade at 1.314 to the U.S. dollar, down 4.3 percent this year.
The Bank of Canada issued the following statement: