Canada maintains rate but higher rates still warranted

September 5, 2018

By CentralBankNews.info
      Canada’s central bank left its benchmark target for the overnight rate steady at 1.50 percent but confirmed that it was still on a monetary tightening path by saying recent economic data reinforced its view that “higher interest rates will be warranted to achieve the inflation target.”
       While the Bank of Canada (BOC) reiterated it is taking a gradual approach to monetary tightening and is guided by new data and how the economy adjusts to higher interest rates, it added that it is also monitoring closely the outcome of NAFTA trade negations with the United States and general trade policy developments and their impact on the inflation outlook.
       The BOC has raised its key rate four times and by a total of 100 basis points since July 2017, most recently in July when it also said further rate hikes will be warranted to keep inflation near its 2.0 percent target.
       Despite the uncertainty weighing on the global economy and Canadian businesses from the U.S. trade policy, BOC said the rotation of demand towards investment and exports is proceeding, with both growing solidly for several quarters.
       But there are signs of the impact of higher interest rates, with housing market activity stabilizing as households adjust to higher rates and new housing policies, and credit growth is moderating while household debt-to-income ratio is beginning to edge down, BOC said, adding that continuing gains in employment and income is still supporting consumption.
       Speculation over a BOC rate hike today was fueled when data showed that headline inflation hit a higher-than-expected 3.0 percent in July, the highest since September 2011, and up from 2.5 percent in June.
       But BOC attributed the jump to higher airfares and said it expects headline inflation to move back towards 2 percent early next year. And measures of core inflation remain firmly around 2 percent, consistent with an economy operating near capacity while wage growth is moderate.
       Canada’s economy is evolving largely in line with the central bank’s forecast from July, with growth expected to slow temporarily in the third quarter, mainly due to fluctuations in energy production and exports.
       While trade tensions remain a key risk for the global outlook and pulling some commodity prices lower, BOC said intensified stresses in some emerging economies still had limited spillovers to other countries.
       In July BOC forecast growth this year of 2.0 percent, 2.2 percent in 2019 and 1.9 percent in 2020. The impact of U.S. trade sanctions already implemented was estimated to subtract 0.67 percent from Gross Domestic Product by the end of 2020, an amount it described as “modest.”

     
     
      The Bank of Canada released the following statement:

“The Bank of Canada today maintained its target for the overnight rate at 1 ½ per cent. The Bank Rate is correspondingly 1 ¾ per cent and the deposit rate is 1 ¼ per cent.
CPI inflation moved up to 3 per cent in July. This was higher than expected, in large part because of a jump in the airfare component of the consumer price index. The Bank expects CPI inflation to move back towards 2 per cent in early 2019, as the effects of past increases in gasoline prices dissipate. The Bank’s core measures of inflation remain firmly around 2 per cent, consistent with an economy that has been operating near capacity for some time. Wage growth remains moderate.  
Recent data on the global economy have been consistent with the Bank’s July Monetary Policy Report (MPR) projections. The US economy is particularly robust, with strong consumer spending and business investment. Elevated trade tensions remain a key risk to the global outlook and are pulling some commodity prices lower. Meanwhile, financial stresses have intensified in certain emerging market economies, but with limited spillovers to other countries.
The Canadian economy is evolving closely in line with the Bank’s July projection for growth to average near potential. Following growth of 1.4 per cent in the first quarter, GDP rebounded by 2.9 per cent in the second quarter, as the Bank had forecast. GDP growth is expected to slow temporarily in the third quarter, mainly because of further fluctuations in energy production and exports.
While uncertainty about trade policies continues to weigh on businesses, the rotation of demand towards business investment and exports is proceeding. Despite choppiness in the data, both business investment and exports have been growing solidly for several quarters. Meanwhile, activity in the housing market is beginning to stabilize as households adjust to higher interest rates and changes in housing policies. Continuing gains in employment and labour income are helping to support consumption. As past interest rate increases work their way through the economy, credit growth has moderated and the household debt-to-income ratio is beginning to edge down.
Recent data reinforce Governing Council’s assessment that higher interest rates will be warranted to achieve the inflation target. We will continue to take a gradual approach, guided by incoming data. In particular, the Bank continues to gauge the economy’s reaction to higher interest rates. The Bank is also monitoring closely the course of NAFTA negotiations and other trade policy developments, and their impact on the inflation outlook.”
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