The Bank of Canada raised Canada’s overnight rate to 1.5 % on July 11, 2018.
This hike was largely expected by commentators, and comes amid rising trade tensions and a stronger US dollar in recent weeks.
As our economy continues to strengthen, the previous 2% growth estimates seem to be on track for the next 3 years. In light of trade uncertainty in areas like exports and investment portfolio, projected inflation is likely to continue maintaining a Canadian economy at almost full capacity.
As at the time of writing, the deposit rate stood at a comparable 1.25 %, and the Bank Rate at 1.75 %. When the Monetary Policy Report was released in April this year, Bank of Canada representatives confidently communicated expectations of approximately 3.75 % global economic growth rate for 2018. They added predictions of a slow down to just 3.5 % for the 2019 financial year overall.
Uncertainty for Canada’s domestic economy
Meanwhile, Canada’s domestic economy has an uncertain future, with quarterly growth rates proving more volatile than previously hoped. This is due to several factors, both international and domestic, including:
- A booming export market, thanks to higher prices on commodities and an increased global demand for Canadian goods and services. Current trade tensions, however, are taking their toll in this sector and it will be interesting to watch the country’s position as talks continue.
- Lower household spending (mostly attributed to stricter guidelines for mortgage lenders and borrowers, and higher interest rates in general).
- Growing business investment thanks to reliable demand levels and investor confidence.
- A rallying housing market after a shaky start to the 2018 financial year.
- The unprecedented implementation of hefty tariffs on steel and aluminum by the US. Canada’s countermeasures to this move have also been built into the current economic data set.
Wage growth has slowed 2.3% behind expectations in a tightly-wound labor market. The central bank is carefully watching for reactions to the rate hike and possible trade actions by the business sector and consumer market.
New steel and aluminum tariffs may exert added pressure to the industry and its workforce. But, this is already built into the projections as a moderate hiccup.
Canada’s next Monetary Policy Report will be released on October 24, 2018. Expected projections on economic growth, inflationary pressures and trade will depend largely on mounting trade tensions and the fate of the US dollar.
The global economy has experienced a number of interesting changes during the first half of 2018. Oil prices have risen again. Emerging markets are under renewed financial strain as the US dollar strengthens, and market expectations of policy rate increases and US currency climbs are vindicated.
Even in the wake of these developments, the Canadian dollar is weaker against the dominance of the US dollar. It’s caught in the midst of unpredictable trade actions and a growing likelihood of trade protection policies being implemented by others.
Improvement during second quarter
Bank of Canada projects a slight improvement in economic growth for the second quarter to 2.8%; and then a drop back below 2% for third quarter prospects.
Consumer Price Index (CPI), the central bank’s primary measure of inflationary forces, remains around 2%. CPI-based inflation may hit a moderate 2.5% sometime in the next 18 months. But, we can expect it to return to its target of 2% by late 2019.
Bank of Canada and the Governing Council offer assurance that higher interest rates are vital to maintaining Canada’s inflationary target. The bank is specifically attuned to economic shifts, as higher interest rates can boost capacity and apply wage rate pressures. Bank of Canada promises that future measures will be well-considered, responsive and true to incoming data.
Canadians wait with bated breath for the next scheduled announcement of the overnight rate target: