OTTAWA — The Bank of Canada raised its benchmark interest rate Wednesday in an economy that it predicts will remain resilient even as it faces an even bigger bite from deepening trade tensions.
The rate hike was the central bank’s first interest rate move in six months and lifted the trend-setting rate to 1.5 per cent, up from 1.25 per cent. It was the bank’s fourth rate increase over the last 12 months.
The decision, a move that will likely prompt Canada’s big banks to raise their prime rates, arrived in the middle of a trade dispute between Canada and the United States that’s expected to hurt both economies.
The bank took the step even as it predicts larger impacts from the widening trade uncertainty, particularly after the United States imposed steel and aluminum tariffs on Canada and Ottawa’s retaliatory measures. The tariff fight, the bank estimated, will shave nearly 0.7 per cent from Canada’s economic growth by the end of 2020.
However, the bank expects the negative blow of the trade policies recently put in place to be largely offset by the positives for Canada from higher oil prices and the stronger U.S. economy.
“Although there will be difficult adjustments for some industries and their workers, the effect of these measures on Canadian growth and inflation is expected to be modest,” the bank said in a statement.
But in addition to steel and aluminum tariffs, Canada is facing a significant trade-related unknown that many believe would inflict far more damage on the economy: U.S. duties on the automotive sector
U.S. tariffs on the auto sector’s integrated cross-border supply chains would have “large impacts on investment and employment,” the Bank of Canada warned Wednesday in its accompanying monetary policy report.
The bank, however, didn’t quantify the possible effects of auto tariffs on Wednesday. Governor Stephen Poloz has signalled in the past that he’s focused on data he can measure rather than the impacts of trade policies that have yet to materialize.
Canadian businesses must also contend with the uncertainty surrounding the difficult renegotiation of the North American Free Trade Agreement, for which talks have stalled.
The Bank of Canada also has its eye on how widening global trade disputes, including an intensifying battle between the U.S. and China, will affect the world’s economy. It warns that “escalating trade tensions pose considerable risks to the outlook” at the global level.
Even with the trade issues, the Bank of Canada is now predicting slightly stronger growth for Canada over the next couple of years, according to updated projections it released Wednesday in its quarterly monetary policy report.
It expects real gross domestic product to grow 2.2 per cent in 2019, up from its April call of 2.1 per cent, and by 1.9 per cent in 2020, compared with its previous prediction of 1.8 per cent. The economy’s growth projection for this year remains at two per cent, the bank said.
Looking ahead, the bank predicts Canadian growth will continue to see bigger contributions from exports and business investment, which were both stronger than expected in the first three months of the year.
At the same time, household spending will represent a smaller and smaller share of overall growth due to the dampening effects of higher interest rates and stricter mortgage rules, it said.
Leading up to the announcement Wednesday, Poloz was widely expected to raise the interest rate following a run of healthy economic numbers, including the Bank of Canada’s own survey on business sentiment, tightened job markets and growth in wages.
Moving forward, the bank said it expects higher interest rates will be necessary over time to keep inflation near its target, however, it intends to continue along a gradual, data-dependent approach.
The country’s inflation rate is expected to rise to 2.5 per cent — above the two per cent mid-point of the bank’s target range — due to temporary factors such as higher gasoline prices before settling back down to two per cent in the second half of 2019.
Follow @AndyBlatchford on Twitter
Andy Blatchford, The Canadian Press
Connect with us Facebook
Eerily empty condo-style retail mall in Calgary postpones grand opening
Vancouver councillors move ahead with policy for duplexes on detached home lots
Condo developers increasingly using art to stand out and land buyers
Canadians more willing to relocate but cost is a big consideration
Realtors lack access to TREB sales data despite promise to make it available
Bank of Canada holds interest rate, but data ‘reinforce’ view more hikes needed
Keeping up with the Joneses may result in over spending
Plan your cottage inheritance
Bank of Canada holds interest rate for now, puts more focus on NAFTA
Trade ‘front and centre’ in Bank of Canada’s call to hold interest rate: Wilkins
- Eerily empty condo-style retail mall in Calgary postpones grand opening
- Vancouver councillors move ahead with policy for duplexes on detached home lots
- Condo developers increasingly using art to stand out and land buyers
- Canadians more willing to relocate but cost is a big consideration
- Realtors lack access to TREB sales data despite promise to make it available
5 Mortgage Secrets10 months ago
5 SECRETS THE BANK DOESN’T WANT YOU TO KNOW ABOUT YOUR MORTGAGE
Buying a Home3 months ago
6 Reasons to be Pre-Approved for a Mortgage Early
Finance2 months ago
When is a Variable Rate Mortgage the Smart Choice?
Home Page5 months ago
Central bank raises key metric used to determine mortgage eligibility
5 Mortgage Secrets7 months ago
THE POSTED RATE SCAM Mortgage Secret 2 of 5
Buying a Home5 months ago
3 Documents You Didn’t Know You Need for Your Mortgage Approval
Buying a Home4 months ago
5 Steps to a Guaranteed Mortgage Approval
5 Mortgage Secrets7 months ago
THE PENALTY COVER UP Mortgage Secret 3 of 5