Bank of Canada delivers another hike, key interest rate rises to 1.5%
11 July, 2018, 23:02
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.
The Bank of Canada today increased its target for the overnight rate to 1 ½ per cent.
The Bank Rate is correspondingly 1 ¾ per cent and the deposit rate is 1 ¼ per cent.
The central bank's rate decision arrives as Canada faces significant trade-related uncertainties, including stalled NAFTA talks, US steel and aluminum tariffs and the threat of more duties on the automotive sector. 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.
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The bank said US steel and aluminum tariffs imposed in June and retaliatory countermeasures by Canada in July would trim exports, imports and economic growth, and boost inflation, but strong global demand and higher commodity prices were offsetting the tariff headwind. Household spending is being dampened by higher interest rates and tighter mortgage lending guidelines.
"This should be consistent with a more firm pricing for another hike this year", said Alvise Marino, FX strategist at Credit Suisse in NY. It's expected to settle back down to 2% in the second half of 2019.
The bank, however, noted in its report that despite "healthy" labour market conditions, employment growth and average hours worked have slowed down compared to last year's surge.
National Bank of Canada experts wrote in a note to clients Wednesday that when it comes to future hikes Poloz may choose to err on the side of caution because of the threats of auto tariffs, which they warned, if applied, would have "unambiguously devastating economic impacts", particularly in Ontario.