Bank of Canada Rate Annoucement - July 11, 2018
July 11, 2018 | Posted by: Crescent Mortgage Corp.
As tariff battles wage on between the US and its key trading partners, the BoC has announced it is raising its benchmark interest rate 25 bps to 1.50%. This is the fourth hike in the past year and puts the rate at its highest level since December of 2008.
While this increase was not unexpected by the market, there remains uncertainty regarding the pace at which the BoC will move the target going forward.
In today's statement the BoC stated “Higher interest rates will be warranted to keep inflation near target and we will continue to take a gradual approach, guided by incoming data,”
Even at 1.50%, the benchmark rate is still considerably lower than the estimated “neutral” level (theoretical value where rates neither halt or stimulate growth) of 2.50 - to 3.50%. Having said that, the BoC acknowledged that the impact of increasing trade turmoil on the Canadian economy is expected to be larger than originally estimated.
Despite the fact that the Trump plans to go ahead with tariffs on another US$200-billion of Chinese goods and China has stated they will respond in kind, the BoC still believes the current strength of the Canadian economy makes the overall impact of trade tensions manageable. Latest estimates suggest GDP would only be reduced by 0.60% by the end of 2020, as rising oil prices and stronger US growth should offset some of the damage inflicted by the trade 'war'.
One important thing to note is that this estimate does not take into account the U.S. threat to impose additional duties on imported vehicles and parts, a policy that would have large negative impacts on consumer spending and business investment across the Canadian economy.
The BoC estimates Canada’s economy to grow by 2.00% this year, 2.20% in 2019 and 1.90% in 2020. The next rate announcement is scheduled for September 5th.