Bank of Canada to make interest rate decision amid strong economic environment

Dianna Christensen
January 18, 2018

The Canadian dollar closed at an average trading value of 80.48 cents United States, down 0.04 of a USA cent, recovering from greater losses earlier in the session after the central bank said it would raise its key interest rate target by a quarter of a percentage point to 1.25 per cent. NAFTA uncertainty hangs over the outlook, with the Bank explicitly downgrading the outlook for business investment and trade to account for the impact of negotiations.

The loonie rebounded from its earlier losses following the Bank of Canada's dovish interest rate hike announcement Wednesday, as Wall Street soared to new highs.

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"Recent data have been strong, inflation is close to target and the economy is operating roughly at capacity", the Bank of Canada said.

TD Bank, RBC and CIBC have all raised lending rates to customers in anticipation of the move.

In Canada, real GDP growth is expected to slow to 2.2 per cent in 2018 and 1.6 per cent in 2019, following an estimated 3.0 per cent in 2017. However, two strong reports - the December jobs data and the bank's business outlook survey - led many experts to change their calls. That would follow its last two quarter-point hikes in July and September.

Bank of Canada to make interest rate decision amid strong economic environment

However, the bank expressed growing concern about the future of the North American Free-Trade Agreement (NAFTA), which will hold its sixth round of talks in Montreal next week. But dark clouds on the trade horizon had many watchers downgrading their expectations. At the very least, he said, the statement reinforces "the need to be cautious in how fast they hike ahead".

Heading into the decision Wednesday, Scotiabank Economics forecasted three hikes totalling 75 basis points throughout 2018 and three more in 2019.

Subdued exports are the top risk in light of NAFTA uncertainty and recent imposition of tariffs by the U.S. Also, more rapid potential output, stronger U.S. growth and more robust consumer spending were seen as risks.

"But as long as the data continues to come in as it's been doing, steadily improving" she said, "we are going to see more rate hikes". Canada did so well in 2017 that it left little slack in labour markets or capacity in its wake, easily justifying a quarter-point hike today.

The BoC's qualification rate is all-important because it's used for most mortgage testing. "For a household making $70,000 a year, that means a $4,000 to $5,000 smaller maximum mortgage".

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