Bank of Canada Tightens Again as Expected

October 24, 2018

In increments of 25 basis points, Canada’s central bank interest rate target has climbed from 0.50% at mid-2017 to 1.75% after today’s actions. Previous rate hikes occurred in July, May and January of this year as well as July 2017. These increases are part of a rate normalization campaign that, according to a released statement, has further to go.

In determining the appropriate pace of rate increases, Governing Council will continue to take into account how the economy is adjusting to higher interest rates, given the elevated level of household debt. In addition, we will pay close attention to global trade policy developments and their implications for the inflation outlook.

Updated  macroeconomic forecasts are embodied in a new quarterly Monetary Policy Report that was published in conjunction with today rate announcement. Real GDP is projected to expanded 2.1% on average in 2018 and 2019 followed by 1.9% in 2020. This more or less matches the likely expansion of potential GDP. Given that Canada’s output gap is believed to be no wider than plus-or-minus 0.5%, the implication for total and core inflation is close alignment with the 2.0% target over the forecast horizon. As always, there are risks. “A further escalation of trade tensions, wage and inflation surprises, or a sharp rise in oil prices could lead to an even faster tightening of global financial conditions than that included in the Bank’s projection.” On the other hand, “price levels remain high in the greater Vancouver and Toronto areas, and the economy is in a rising interest rate environment. Thus, there remains a risk of a sharp decline in house prices in these markets, which could dampen consumption, housing demand and construction activity.”

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



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