Bank of Canada Raises the Rates

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Bank of Canada Raises rates to 1.25%

The Bank of Canada raises the rate in advance of analyst expectations. It was believed the BoC would not raise rates until well into the 2018 year. This has come as a surprise to many economists as the key indicators that are used to predict rate increases pointed in a different direction. The last announcement rate increase that occurred was in early Sept of 2017 you can read the story here. The following is the message received directly from the Bank of Canada…

Bank of Canada increases overnight rate target to 1 1/4 percent

The Bank of Canada today increased its target for the overnight rate to 1 1/4 percent. The Bank Rate is correspondingly 1 1/2 percent and the deposit rate is 1 percent. Recent data have been strong, inflation is close to target, and the economy is operating roughly at capacity. However, uncertainty surrounding the future of the North American Free Trade Agreement (NAFTA) is clouding the economic outlook.

The global economy continues to strengthen, with growth expected to average 3 1/2 percent over the projection horizon. Growth in advanced economies is projected to be stronger than in the Bank’s October Monetary Policy Report(MPR). In particular, there are signs of increasing momentum in the US economy, which will be boosted further by recent tax changes. Global commodity prices are higher, although the benefits to Canada are being diluted by wider spreads between benchmark world and Canadian oil prices.

In Canada, real GDP growth is expected to slow to 2.2 percent in 2018 and 1.6 percent in 2019, following an estimated 3.0 percent in 2017. Growth is expected to remain above potential through the first quarter of 2018 and then slow to a rate close to a potential for the rest of the projection horizon.

Consumption and residential investment have been stronger than anticipated, reflecting strong employment growth. Business investment has been increasing at a solid pace, and investment intentions remain positive. Exports have been weaker than expected although, apart from cross-border shifts in automotive production, there have been positive signs in most other categories.

Looking forward, consumption and residential investment are expected to contribute less to growth, given higher interest rates and new mortgage guidelines, while business investment and exports are expected to contribute more. The Bank’s outlook takes into account a small benefit to Canada’s economy from stronger US demand arising from recent tax changes. However, as uncertainty about the future of NAFTA is weighing increasingly on the outlook, the Bank has incorporated into its projection additional negative judgment on business investment and trade.

The Bank continues to monitor the extent to which strong demand is boosting potential, creating room for more non-inflationary expansion. In this respect, capital investment, firm creation, labor force participation, and hours worked are all showing promising signs. Recent data show that labor market slack is being absorbed more quickly than anticipated. Wages have picked up but are rising by less than would be typical in the absence of labor market slack.

In this context, inflation is close to 2 percent and core measures of inflation have edged up, consistent with diminishing slack in the economy. The Bank expects CPI inflation to fluctuate in the months ahead as various temporary factors (including gasoline and electricity prices) unwind. Looking through these temporary factors, inflation is expected to remain close to 2 percent over the projection horizon.

While the economic outlook is expected to warrant higher interest rates over time, some continued monetary policy accommodation will likely be needed to keep the economy operating close to potential and inflation on target. Governing Council will remain cautious in considering future policy adjustments, guided by incoming data in assessing the economy’s sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation.

The next scheduled announcement is set for March 7th 2018.

For questions or comments please do not hesitate to contact me at 514-680-4674

Terry Kilakos

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