As predicted, the Bank of Canada opted to increase its target for the overnight rate today to 1.25%, up from 1%. It’s reasoning? Strong recent data, close-to-target inflation and an economy that’s operating pretty much at capacity.
While things are looking up right now, however, the Bank doesn’t expect it to stay this strong for long. It predicts real GDP growth will slow to 2.2% in 2018 and 1.6% in 2019. For a bit of context, the Bank estimates GDP growth reached 3.0% in 2017.
The uncertain state of NAFTA is also clouding future economic predictions and definitely has the potential to negatively impact business investment and trade. On the flip side, however, Canada has seen some stronger US demand arising from the recent tax changes south of the border, business demand has been picking up and there are some positive signs emerging on the export front.
All in all, no one—not even the Bank—is certain what the next few interest rate announcements will contain. With the economy picking up, the Bank acknowledges that higher interest rates may be warranted over time, but it doesn’t want those hikes to hinder economic potential or send inflation far off-target. As a result, it will “remain cautious in considering future policy adjustments” and use incoming data to assess “the economy’s sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation.”
The next interest rate announcement is scheduled for March 7. If you’re interested, you can read the entire interest rate announcement here: https://www.bankofcanada.ca/2018/01/fad-press-release-2018-01-17/.