A sign is pictured outside the Bank of Canada building in Ottawa, Ontario, Canada, May 23, 2017. REUTERS/Chris Wattie
October 24, 2018
By David Ljunggren and Steve Scherer
OTTAWA (Reuters) – The Bank of Canada on Wednesday raised interest rates as expected and said more hikes would be needed to keep inflation in check, while also hailing a new North American trade pact it forecast would reduce economic uncertainty.
The central bank – which has now lifted rates five times since July 2017 – tweaked its standard language on future hikes, dropping previous references to a gradual pace of tightening.
“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,” it said.
The bank’s outlook for the Canadian economy was generally positive, given solid growth in both foreign and domestic demand and favorable financial conditions.
Trade uncertainty in North America, which the bank had previously flagged as a major potential risk, will diminish after the United States, Canada and Mexico agreed a new continental trade agreement on Sept. 30, it said.
On a more gloomy note, it said trade tensions between the United States and China were weighing on global growth and commodity markets and “could have a significant and lasting impact on the global economy”.
The rate increase, by a quarter of a percentage point, took the bank’s overnight interest rate to 1.75 percent, still well below the “neutral” rate of 2.5-3.5 percent where monetary policy is neither stimulative or accommodative.
The bank, noting the U.S. economy was “especially robust,” boosted its estimate of third quarter annualized Canadian growth to 1.8 percent from 1.5 percent. Growth in the fourth quarter should jump to 2.3 percent, it added.
Although the continental trade deal and a recently approved liquid natural gas project meant rosier projections for business investment and exports, a recent decline in commodity prices would have a dampening effect in future.
The bank said overall inflation should drop in early 2019 as the effect of temporary factors fades and then remain at around 2.0 percent – the mid point of its 1 to 3 percent target range – through the end of 2020.
Household spending would continue growing at a healthy pace, the central bank predicted.
“Households are adjusting their spending as expected in response to higher interest rates and housing market policies … household vulnerabilities are edging lower in a number of respects,” said the bank, which has long fretted about Canadians’ ability to cope with higher borrowing costs.
(Reporting by David Ljunggren and Steve Scherer; Editing by Bernadette Baum)
