Bank of Canada Tightens Further

July 11, 2018

Canada’s overnight target central bank rate was lifted to 1.50% today. Bank of Canada officials had prepared markets to expect such a move today. It follows similar 25-basis point increases enacted in September 2017, January 2018 and, most recently, May 2018. A released statement of explanation points to more normalization in the future.

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. 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.

A fresh quarterly Monetary Policy Report was also published today. Projected growth in 2018 has been revised upward for the United States to 3.1% but downward to 2.2% in the euro area, 0.9% in Japan and 6.5% in China. Canada is now perceived by officials to be operating near full capacity, and expected growth of 2.0% in 2018 and 2.2% in 2019 would somewhat surpass the midpoints of the range of potential GDP growth in those years. CPI inflation this year is projected at an above-target 2.4% but is seen easing back to 2.2% in 2019 and 2.1% in 2020.

Canada’s outlook is not without uncertainty and risk, primarily related to U.S. and oil developments. “The US economy is proving stronger than expected, reinforcing market expectations of higher policy rates and pushing up the US dollar. This is contributing to financial stresses in some emerging market economies. Meanwhile, oil prices have risen. Yet, the Canadian dollar is lower, reflecting broad-based US dollar strength and concerns about trade actions. The possibility of more trade protectionism is the most important threat to global prospects…The Bank estimates that trade uncertainty and US trade actions already implemented will subtract about 2/3 percent from GDP by the end of 2020.” A large section of the MPR is devoted to the possible effects of U.S. protectionism on Canadian exports and investment.

Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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