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Bank of Canada Hikes Overnight Rate by Quarter Percentage Point

July 12, 2017

The Conference Board of Canada’s Chief Economist Craig Alexander offers the following perspectives/insights:

Quote

“The Canadian economy no longer requires the rate cuts that were delivered to help reduce the negative fallout from lower commodity prices. Moreover, the tightening of monetary policy will help to incrementally reduce risks associated with high levels of household indebtedness and real estate price imbalances in parts of the country. Accordingly, the rate hike is welcome news,”
—Craig Alexander, Senior Vice-President and Chief Economist, The Conference Board of Canada.

Insights

  • The Bank of Canada raised the overnight rate by a quarter point to 0.75 per cent today. The tightening of monetary policy reflected confidence that the Canadian economy will continue to grow at above its potential pace in the coming quarters, reducing slack in the economy sooner than anticipated and eventually raising inflation towards the Bank’s 2 per cent inflation target.
  • Some will find the Bank’s decision confusing, as inflation measured by the year-over-year change in the Consumer Price Index is only at 1.3 per cent and wage growth is tepid. However, changes in the interest rates have their full effect on the economy with a lag of 12-to-18 months. In other words, the Bank sets policy not on the basis of where the economy is today, but rather what economic conditions will be in a year’s time. The economic outlook is for a solid performance going forward. Moreover, the Bank was clear that it views many of the factors restraining inflation, such as low growth in food prices, as temporary. 
  • The interest rate announcement came with the release of the Monetary Policy report. In its updated economic forecast, the Bank is predicting Canadian economic growth of 2.8 per cent in 2017 and 2.0 per cent in 2018, slowing to 1.6 per cent in 2019. The near-term outlook for growth is marginally faster than the forecasts of The Conference Board of Canada. The latest monthly data show solid momentum in the economy and broadening strength across sectors and industries.
  • The rate decision communique highlighted the strengthening of the global economy, which is supportive to Canadian exports. It noted that Canadian economic growth has been fuelled by consumer spending, but the Bank is hoping that a long-awaited acceleration in business investment may be in the cards, as suggested by the Business Outlook Survey. 
  • Rising interest rates may cause some consternation about the impact on household finances. However, the level of rates remains very low and regulatory actions by governments are likely to have limited sustained effects in tempering household borrowing. Ultimately, higher interest rates are what is needed to reduce the vulnerability of high household indebtedness and real estate price imbalances in parts of the country. Thus, today’s decision to raise rates is a positive development. 

 


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Photo of Craig Alexander Craig Alexander
Senior Vice-President and Chief Economist

Craig Alexander brings over 19 years of experience in the private sector as an economic and financial forecaster to the position of Senior Vice President and Chief Economist. He oversees the Board’s macro-economic outlook products, custom economic and tourism research.

Follow Craig on Twitter

@CraigA_Eco


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