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Canada Monetary Policy September 2018

Canada: Bank of Canada stays the course, mulls October rate hike

On 5 September, the Bank of Canada (BoC) held its target for the overnight at 1.50%, as widely expected by market analysts. Solid fundamentals and contained inflation drove the decision. Although downside risks persist, especially with respect to the evolution of trade tensions with the United States, BoC officials once again stressed that higher rates would be warranted over the short term as the economy operates increasingly closer to potential.

Although inflation hit 3.0% in July, the Bank was quick to note the transient effects of higher fuel costs and pointed to core measures which have been hovering near 2.0% in recent months. Moreover, the economy has been growing in line with earlier projections, and the evolution of business investment and exports as increasingly vital drivers has proceeded as expected. Renewing NAFTA remains a key concern for BoC officials, but they were quick to offset these external risks with brighter domestic prospects; these include recent employment gains and the nascent stabilization of the housing market.

Upbeat economic data left room for optimism in September, and BoC officials took a relatively hawkish stance despite highlighting the serious uncertainties facing the economy—namely any fallout from a trade spat with the U.S. and still-major imbalances in the domestic housing market. Analysts concluded that the BoC’s language in September’s statement points to a rate hike in its next announcement in October, especially given officials’ emphasis on capacity constraints and wage growth. As it stands, a majority of FocusEconomics analysts see another rate hike in the fourth quarter and expect the pace of increases to persist into next year.

Commenting on the BoC’s decision, Brian DePratto, senior economist at TD Economics, noted:

“No surprise here. […] Barring a major shock, an October hike looks like a pretty safe bet, but after that the picture becomes murky. The Bank has been marking down its growth outlook to account for trade uncertainty – any resolution on the NAFTA front is thus likely to mean a stronger outlook, and by extension, a faster pace of hikes, all else equal.”

The Bank’s next monetary policy announcement is scheduled for 24 October.

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