Bank of Canada raises overnight rate target to 1 ½ per cent

Marco Green
July 12, 2018

At the rate decision, BoC officials said they expect "higher interest rates will be warranted to keep inflation near target", offering some insight on the stance of the bank heading into future rate decisions.

"This rate hike signals that the Bank of Canada is determined to bring its benchmark overnight rate back to more normal levels and that the economy is strong enough to withstand further rate increases", Sherry Cooper, chief economist at Dominion Lending Centres, wrote in a research note.

The Bank expects the global economy to grow by about 3 ¾ per cent in 2018 and 3 ½ per cent in 2019, in line with the April Monetary Policy Report (MPR). In particular, the Bank is monitoring the economy's adjustment to higher interest rates and the evolution of capacity and wage pressures, as well as the response of companies and consumers to trade actions.

The bank raised the rate even as it predicts larger impacts from the widening trade uncertainty, particularly after the United States imposed steel and aluminum tariffs on Canada and Ottawa's retaliatory measures.

The fourth rate increase since July 2017 comes as Canada grapples with the pressures of rising inflation and solid job growth despite an increasingly hostile USA trade policy that could choke off demand from Canada's largest export market.

"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".

Money markets see a almost 70 per cent chance of further Bank of Canada tightening by December. However, it intends to continue with its gradual, data-dependent approach. Inflation ran at a 2.2-per-cent pace in May, slightly above the Bank's target of 2 per cent.

Other reports by Click Lancashire

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