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Bank of Canada Hikes Rates and Signals More Increases to Come

Oct 24, 2018

The Conference Board of Canada’s Principal Economist Alicia Macdonald offers the following insights on today's Bank of Canada interest rate announcement:

Quote

“After holding interest rates steady last month, The Bank of Canada lifted interest rates 25 basis points this morning, bringing the overnight rate to 1.75 per cent. With less risk on the trade front and improving investment intentions, the Bank is expected to raise borrowing costs again in January.” 
—Alicia Macdonald, Principal Economist, The Conference Board of Canada.

Insights

  • The Bank of Canada raised its overnight rate by 25 basis points to 1.75 per cent this morning.
  • With inflation at target and the economy expected to continue to operate at, or close to, capacity the Bank said that it will need to bring interest rates to a neutral stance to maintain inflation at target. The latest estimate from the Bank of Canada pegs its neutral policy rate between 2.5 and 3.5 per cent.
  • While the Bank is expected to make future policy decisions based on incoming data, gone from this mornings communication was a reference to gradual rate hikes although they will continue to monitor households adjustment to higher rates and developments in global trade policy.
  • A reduction in monetary stimulus is warranted given that strong economic growth in Canada over the last year and a half that has shrunk excess capacity and pushed down unemployment to near 40-year lows. But the future course of monetary policy will be determined by how the economic outlook evolves over the coming quarters. Given high consumer debt levels, policy makers are hoping to see the economy shift towards investment and export led growth going forward.
  • After surging at the beginning of the year, business investment slowed sharply in the second quarter. However, the Bank of Canada’s autumnBusiness Outlook Survey showed a rebound in investment intentions due to strong demand and capacity pressures.
  • Additionally, the recent decision to build the $40 billion LNG Canada facility will provide a much-needed boost to energy investment while the recent United States-Mexico-Canada Agreement will reduce uncertainty on the trade front.
  • On the downside, our own business sentiment measure shows that firms remain hesitant to invest given concerns around regulation and our relative competitiveness.
  • Overall, the Conference Board’s latest forecast expects that investment will continue to expand given strong domestic demand but that the outlook for non-energy exports will remain challenging over the near term. Despite this, we expect economic growth to be strong enough to warrant a continued reduction in monetary stimulus. Our outlook for interest rate increases remains unchanged this morning—three rate hikes in 2019 with the next increase coming in January.

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