Bank of Canada raises interest rate for first time in 6 months

Lloyd Doyle
July 13, 2018

The central bank's rate decision arrives as Canada faces significant trade-related uncertainties, including stalled NAFTA talks, US steel and aluminum tariffs and the threat of more duties on the automotive sector.

The Bank of Canada 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.

Undaunted by expanding trade risks, the Bank of Canada governor Stephen Poloz raised the interest rate Wednesday and signalled the economy's resilience is keeping him on a hiking trajectory.

It was the bank's fourth increase over the last 12 months and the first time the rate has been this high since December 2008. -Canada trade dispute would figure prominently in the bank's decision-making process for today's rate announcement.

The bank's relatively sanguine view of the trade risk boosted the Canadian dollar to its strongest in almost four weeks, and economists said they expected the central bank to hike again by year end.

The Bank said Canada's economy is operating "close to capacity", implying that it expects to see inflation rise in the future.

"The escalation of trade actions was quite a part of our discussions, but we agreed very early on that it was not going to be the basis for our decision", Poloz told a news conference.

The Bank of Canada has increased its key interest rate by a quarter-point to 1.5 per cent in a move that was widely expected. "Temporary factors are causing volatility in quarterly growth rates: the bank projects a pick-up to 2.8% in the second quarter and a moderation to 1.5% in the third".

In addition to tariffs, Canadian businesses must also contend with the uncertainty surrounding the stalled talks on NAFTA's renegotiation.

It means consumers with variable rate mortgages or upcoming mortgage renewals will have to pay more.

Many economists anticipate several more hikes this year and in 2019.

Other reports by Iphone Fresh

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