Central bank hikes rate, predicts modest overall impact from US tariff fight

Lloyd Doyle
July 11, 2018

Governing Council expects that higher interest rates will be warranted to keep inflation near target and will continue to take a gradual approach, guided by incoming data.

"This rate hike signals that the Bank of Canada is determined to bring its benchmark overnight rate back to more normal levels and that the economy is strong enough to withstand further rate increases", Sherry Cooper, chief economist at Dominion Lending Centres, wrote in a research note.

"Despite hiking rates today, the Bank of Canada is in no rush to continue pushing rates higher given the uncertainties surrounding trade, lingering concerns about housing and household debt, and renewed belief that there's some labour market slack".

Governor Stephen Poloz said trade tensions were the biggest issue on the table.

The bank says persistent trade uncertainty and Canada's tariff fight with the United States will shave almost 0.7 per cent from economic growth by the end of 2020 - but it predicts the blow to be largely offset by the positive impact of higher oil prices.


The bank raised the rate 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.

Economists anticipate several more hikes this year and in 2019.

CPI and the Bank's core measures of inflation remain near 2 per cent, consistent with an economy operating close to capacity.

The Royal Bank of Canada said Wednesday it will increase its prime rate by a quarter of a percentage point to 3.70 per cent, effective Thursday. It also said underlying wage growth has been weaker than what would normally be expected in a tightened job market.

Canadian government bond prices were mostly lower across a flatter yield curve, with the two-year down 4 cents to yield 1.959 per cent and the 10-year falling 5 cents to yield 2.156 per cent.

Other reports by Iphone Fresh

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