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The Quick Take: May 30, 2018

Bank of Canada Holds Rates but Hints at Future Hikes

Alicia Macdonald
Principal Economist
National Forecast

“As widely expected, the Bank of Canada maintained its target for the overnight rate at 1.25 per cent this morning. The Bank hinted at future rate hikes to come, indicating that higher rates will be necessary to keep inflation at target while also reinforcing the notion that interest rates will increase at a gradual pace.”

The Bank of Canada kept its policy rate steady this morning citing that the outlook for growth and inflation is unfolding roughly inline with their expectations.

The decision to hold was widely expected given continued worry over trade protectionism. The renegotiation of NAFTA continues and Canada’s exemption to U.S. steel and aluminum tariffs expires at the end of the week.

Also weighing on the outlook for economic growth this year is a continued adjustment in the housing resale market to new regulations and higher interest rates.

Despite the trade and housing uncertainties facing the economy this year, the Canadian economy remains in good shape. Labour markets are very tight and core inflation is at the Bank’s target.

Indeed, the Bank pointed to a number of positive factors in the Canadian economy, such as strong labour income growth, a better than expected export performance and strong imports pointing to a rebound in business investment.

In previous statements accompanying the policy decision, the Bank maintained that it would take a cautious approach to further rate hikes. This month, the cautious approach was dropped from the statement with the Bank now stating it will take a gradual approach to raising rates.

Our forecast calls moderate economic growth over the course of the year—not so fast to necessitate a rapid withdraw of monetary stimulus but steady enough to allow the Bank to continue raising rates, with an increase expected in July.

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