Canada: Bank of Canada raises policy rate for a second time in September
September 6, 2017
On 6 September, the Bank of Canada (BoC) raised its target for the overnight rate by 25 basis points from 0.75% to 1.00%, following its first 25-basis-points hike on 12 July. The decision affirms the Bank’s motivation to lock in a tightening cycle and to retract the accommodative monetary policy in light of stronger-than-expected growth across key sectors of the economy. Market analysts had been split over whether the Bank would raise rates a second time or stand pat.
The Canadian economy expanded at a stellar pace of 4.5% year-on-year in Q2—the highest among all G7 countries—on the back of robust export growth thanks to a surge in the energy sector and solid consumer spending, which was aided by higher wages and a continued fall in unemployment. Although inflation has remained below the 2.0% target since March, a small pick-up in July suggests price shocks have faded and inflation will return to the target rate in the medium horizon. Moreover, the housing market has started to cool following the revision of tax and housing finance policies, but risks for a correction are not out of sight. All in all, recent developments have affirmed the stability and health of the economy. As a result, the Bank held the view that the removal of loose monetary policy conditions was warranted and that the economy is ready to withstand higher rates.
Going forward, the Bank noted that incoming data on the state of the economy, including labor market conditions and the evolution of the high levels of household debt, will inform the Bank’s future monetary policy decisions. Given the record levels of household debt, the Bank will closely monitor the sensitivity of the economy to the increase in interest rates. Despite the recent upsurge in growth, the Bank still expects the economy to slow down in the second half of the year and remains cautious of global geopolitical risks and additional uncertainties pertaining to international trade and fiscal policies.
The next monetary policy announcement is scheduled for 25 October and will coincide with the release of the Bank’s newest Monetary Policy Report, which will contain its latest forecasts for the economy and inflation.
Author: Lindsey Ice, Economist