Canada central bank maintains key lending rate at 1.25%

Marco Green
April 21, 2018

The mere fact that the Bank of Canada now sees inflation nudging above 2 per cent for the next couple of years does not, on its face, imply that the bank will be more aggressive on rate. While the bank had been widely expected to stay on hold this month, some investors had bet on a surprise hike or hawkish tone, so the Canadian dollar weakened slightly against the greenback on the decision.

"Higher interest rates will be warranted over time, although some monetary policy accommodation will still be needed to keep inflation on target", it said.

The BoC's 75 bps of increases since last summer have already driven mortgage costs to four-year highs.

Wage growth has contributed to improving inflation, but this is not only due to the minimum wage increases.

The bank will continue to assess labour market data for signs of remaining slack.

A day ago, the International Monetary Fund (IMF) projected an economic growth of 2.1 percent for Canada this year. This is another bullish factor that would appear to support expectations of higher interest rates, either now or in the near future, as rising household wages can fuel demand in an economy and further boost inflation. Inflation has been firming in the United States, Japan, and Europe as well as the world economy exhibits synchronized growth.

The Bank of Canada says it will hold its key interest rate steady at 1.25 per cent.

"Inflation is on target and the economy is operating close to potential", governor Stephen Poloz told reporters Wednesday.

Many analysists weighed in following the decision, saying the bank's comments and forecasts for later in the year leave rate hikes on the table for 2018. While it caveats that measuring the economy's speed limit is "subject to considerable uncertainty", it is an improvement from last April's estimate and it stems from gains in labour productivity, owing to recent business investment spending. It should eventually simmer to the bank's target of 2 percent.

The bank raised its growth projection for 2019 to 2.1 per cent, up from its previous prediction of 1.6 per cent, before easing to 1.8 per cent in 2020. This is seen as a temporary hiccup.

Canadian economic growth has in fact come off the boil over recent months with the economy contracting in January, marking the second monthly contraction since the BoC began to raise rates in July 2017. But the positive trend in investment spending is expected to reassert itself in the second quarter. This was outlined in the latest Business Outlook Survey (BOS), and the associated qualitative assessment (written by the BoC) highlighted ongoing capacity issues. While some areas are close to a resolution (including chapters relating to telecoms, energy and technical barriers to trade), the most contentious areas remain unresolved.

Other reports by Click Lancashire

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