Bank of Canada delivers another hike, key interest rate rises to 1.5%

Cornelia Mascio
Luglio 13, 2018

The rate is what banks pay for short-term loans, which affects what consumers pay for things like mortgages, lines of credit and savings accounts.

It was the fourth rate increase in the span of 12 months.

The decision, a move that will likely prompt Canada's big banks to raise their prime rates, arrived in the middle of a trade dispute between Canada and the United States that's expected to hurt both economies. As we progress into the third quarter, the steel, aluminum, and proposed auto tariffs will remain a catalyst for movement between the loonie and the dollar.

However Poloz said the bank can not make policy on the basis of hypothetical scenarios.

The bank's relatively sanguine view of the trade risk boosted the Canadian dollar to its strongest in almost four weeks, and economists said they expected the central bank to hike again by year end.

With the economy operating close to full capacity, waiting too long to start raising the benchmark runs the risk the central bank would have to introduce increases more aggressively, Caranci said.

But in addition to steel and aluminum tariffs, Canada is facing a significant trade-related unknown that many believe would inflict far more damage on the economy: USA duties on the automotive sector.

Poloz recently said the impacts of the U.S.

As with other monetary policy officials, the BoC shed some light on the impact of trade disputes and tariffs on the economy. He added that the unknowns around trade could also include positive developments such as the successful renegotiation of the North American Free Trade Agreement over the coming months.

Aside from the US trade threat, there isn't much to keep the Bank of Canada on hold, added Brett House, deputy chief economist for Scotiabank Economics.

The Bank of Canada's quarterly update predicts the economy will show growth in 2019 and 2020, a better outlook than what was forecast in April.

In a statement, the BOC said it expects the global economy to grow by about 3.75% this year, and by and 3.5% next year. Household spending is being dampened by higher interest rates and tighter mortgage lending guidelines.

"The Bank maintained a cautious tone while highlighting its data dependency, that said, this was not the "dovish" hike many, including ourselves, expected".

For its part, the bank said Wednesday that it's expecting higher interest rates will still be necessary over time to keep inflation near its target. However, it intends to continue with its gradual, data-dependent approach. The Bank estimates that underlying wage growth is running at about 2.3 per cent, slower than would be expected in a labour market with no slack. The increase also comes as the Bank looks to fight rising inflation which has risen above its 2 per cent target. It's expected to settle back down to two per cent in the second half of 2019.

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