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The Quick Take: April 18, 2018

Bank of Canada Holds Rates Steady as Caution Prevails

Alicia Macdonald
Principal Economist
National Forecast

“The Bank of Canada left its overnight rate unchanged in April while offering an upbeat assessment of future growth and acknowledging the recent pickup in price growth. Nevertheless, the economy is facing challenges such as uncertainties around trade policy and the adjustment of households to previous interest rate increases. As a result, we expect the Bank of Canada to continue with its cautious approach to rising rates with the next increase in July.”

The Bank of Canada left its target for the overnight rate at 1.25 per cent.

In its April Monetary Policy report, the Bank downgraded its economic outlook for 2018 due to a weak first quarter, now expecting growth of 2.0 per cent for the year. However, it made a substantial revision to its projection for growth next year, which it now expects to average 2.1 per cent compared to its January estimate of 1.6 per cent.

In its statement accompanying the interest rate decision, the Bank maintained its cautious approach to withdrawing stimulus noting that progress on the wage and inflation front has been positive but the need to watch the sensitivity of the economy to higher interest rates and the evolution of economic capacity.

The cautious approach to reducing stimulus is inline with recent data releases that point to a mixed economic picture. Wage and price growth have both accelerated in recent months, the unemployment rate remains at a historical low and capacity utilization remains elevated. However, GDP contracted in the first month of the year, the trade sector continues to disappoint and the housing market has cooled significantly. Consumer spending has also decelerated with retail sales volumes growing 3.1 per cent year-over-year in January compared to a 4.6 per cent pace at the beginning of 2017.

Overall, the economic backdrop for todays interest rate announcement was one of limited excess capacity, rising wages and inflation above 2 per cent—all factors that point to the need to reduce monetary stimulus. However, growth has slowed significantly over recent months and risks remain on the trade and household front and this will keep interest rates increasing at only a modest pace, with the next increase expected in July as outlined in our latest Canadian Outlook.

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