Bank of Canada delivers another hike, key interest rate rises to 1.5%
11 July, 2018, 22:56
The central bank's rate decision arrives as Canada faces significant trade-related uncertainties, including stalled NAFTA talks, USA steel and aluminum tariffs and the threat of more duties on the automotive sector. It was the fourth rate increase in the span of 12 months. As we progress into the third quarter, the steel, aluminum, and proposed auto tariffs will remain a catalyst for movement between the loonie and the dollar.
The bank's relatively sanguine view of the trade risk boosted the Canadian dollar to its strongest in almost four weeks, and economists said they expected the central bank to hike again by year end. Overall, the Bank still expects average growth of close to 2 per cent over 2018-2020. The BoC believes USA steel tariffs will be felt in the second half of 2018 but could take longer.
Poloz recently said the impacts of the U.S. Talks to renegotiate the North American Free Trade Agreement stalled earlier this year, and Canada imposed retaliatory tariffs this month.
The Bank of Canada also has its eye on how widening global trade disputes, including an intensifying battle between the USA and China, will affect the world's economy. It warns that "escalating trade tensions pose considerable risks to the outlook" at the global level.
The Bank of Canada will also release its updated economic projections today in its latest edition of its quarterly monetary policy report.
It expects real gross domestic product to grow 2.2% in 2019, up from its April call of 2.1%, and by 1.9% in 2020, compared with its previous prediction of 1.8%.
"This should be consistent with a more firm pricing for another hike this year", said Alvise Marino, FX strategist at Credit Suisse in NY. The Bank estimates that underlying wage growth is running at about 2.3 per cent, slower than would be expected in a labour market with no slack.
"Based on our interpretation of the bank's statement, we think that policymakers envisage a somewhat faster pace of tightening, but still think that disappointing data will persuade the governor to stand pat for some time and then, eventually, to force a reversal, with rates falling next year". It's expected to settle back down to 2% in the second half of 2019.
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What many business people are hoping of course, is that this sound and fury is just the start of another series of negotiations. Trade wars can draw blood in several ways. "You tax soybean exports at 25-percent, and you have serious damage to USA farmers".
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