By CentralBankNews.info
Canada’s central bank raised its benchmark target for the overnight rate by another 25 basis points to 1.75 percent and said further increases are necessary to meet the inflation target, with the pace of future rate hikes dependent on how the economy adjusts to higher rates given the elevated level of household debt.
The Bank of Canada (BOC), which has now raised its rate five times and by a total of 125 basis points since July 2017, added it was paying close attention to global trade and its impact on inflation.
The BOC’s rate hike, its third this year, follows this month’s US-Mexico-Canada (USMCA) trade agreement, which has eased business uncertainty, leading to an upward revision in investment and exports along with a boost from the recently-approved liquid natural gas project in British Colombia.
Despite the expected pickup in business confidence and investment, the BOC said the trade conflict between the U.S. and China continues to weigh on global growth and the recent decline in commodity prices, competitiveness challenges and limited transportation is dampening investment and exports.
Canada’s dollar, known as the loonie, rose in response to the rate hike to trade at 1.3 to the U.S. dollar, but is still down 3 percent this year.
“The Canadian economy continues to operate close to its potential and the composition of growth is more balanced,” the BOC said, forecasting growth of 2.1 percent this year and in 2019, and 2020 growth of 1.9 percent.
In July BOC forecast 2018 growth of 2.0 percent, 2.2 percent in 2019 and 1.9 percent in 2020.
In the second quarter of this year, Canada’s gross domestic product grew an annual 1.9 percent, down from 2.3 percent in the first quarter.
Although household spending continues to expand, BOC said they were beginning to rein in their spending in response to higher interest rates and tighter housing market policies. Household credit growth is also continuing to moderate, helping reduce the vulnerabilities of households although it still remains elevated.
Inflation in Canada decelerated further in September to 2.2 percent from a 2018 high of 3.0 percent in July as a summer spike in airfares eased.
BOC expects the impact of past increases in gasoline prices and minimum wages to fade early next year so inflation will remain close to the bank’s 2.0 percent target through the end of 2020.
The Bank of Canada issued the following statement:
“The Bank of Canada today increased its target for the overnight rate to 1 ¾ per cent. The Bank Rate is correspondingly 2 per cent and the deposit rate is 1 ½ per cent.
The global economic outlook remains solid. The US economy is especially robust and is expected to moderate over the projection horizon, as forecast in the Bank’s July Monetary Policy Report (MPR). The new US-Mexico-Canada Agreement (USMCA) will reduce trade policy uncertainty in North America, which has been an important curb on business confidence and investment. However, trade conflict, particularly between the United States and China, is weighing on global growth and commodity prices. Financial market volatility has resurfaced and some emerging markets are under stress but, overall, global financial conditions remain accommodative.
The Canadian economy continues to operate close to its potential and the composition of growth is more balanced. Despite some quarterly fluctuations, growth is expected to average about 2 per cent over the second half of 2018. Real GDP is projected to grow by 2.1 per cent this year and next before slowing to 1.9 per cent in 2020.
The projections for business investment and exports have been revised up, reflecting the USMCA and the recently-approved liquid natural gas project in British Columbia. Still, investment and exports will be dampened by the recent decline in commodity prices, as well as ongoing competitiveness challenges and limited transportation capacity. The Bank will be monitoring the extent to which the USMCA leads to more confidence and business investment in Canada.
Household spending is expected to continue growing at a healthy pace, underpinned by solid employment income growth. Households are adjusting their spending as expected in response to higher interest rates and housing market policies. In this context, household credit growth continues to moderate and housing activity across Canada is stabilizing. As a result, household vulnerabilities are edging lower in a number of respects, although they remain elevated.
CPI inflation dropped to 2.2 per cent in September, in large part because the summer spike in airfares was reversed. Other temporary factors pushing up inflation, such as past increases in gasoline prices and minimum wages, should fade in early 2019. Inflation is then expected to remain close to the 2 per cent target through the end of 2020. The Bank’s core measures of inflation all remain around 2 per cent, consistent with an economy that is operating at capacity. Wage growth remains moderate, although it is projected to pick up in the coming quarters, consistent with the Bank’s latest Business Outlook Survey.
Given all of these factors, Governing Council agrees that the policy interest rate will need to rise to a neutral stance to achieve the inflation target. 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. “