Bank of Canada Maintains Key Interest Rate at 1.25%

Jane Switzer
by Jane Switzer March 7, 2018 / No Comments

Canada’s central bank announced Wednesday morning it’s keeping its target overnight lending rate at 1.25%.

“While the economic outlook is expected to warrant higher interest rates over time, some continued monetary policy accommodation will likely be needed to keep the economy operating close to potential and inflation on target,” the Bank of Canada said in a release.

Zero out of 21 analysts surveyed by Bloomberg ahead of Wednesday’s announcement predicted a rate hike. After nearly seven years of ultra-low interest rates, the central bank has raised rates three times since June 2017, most recently in January. This is the second of eight rate-setting announcements scheduled for 2018, and as of this writing (and depending on who you ask), it’s anticipated the bank will hike rates up to three times by year-end.

However, the bank reiterated it is “guided by incoming data” and will keep an eye on how the economy reacts to interest rates. Canada’s economy is moderating following a burning rate of 3% annualized growth in 2017, with the bank estimating in January that real GDP growth will slow to 2.2% in 2018 and 1.6% in 2019. The economy shed 88,000 jobs in January, all part-time positions, with the largest declines in Quebec and Ontario.

Inflation is running close to the bank’s 2% target, but is fluctuating due to temporary factors such as gasoline, electricity, and minimum wages. The bank notes wage growth has “firmed,” but is lower than it should be in an economy with “no labour market slack.”

The bank says it will take time to assess the impact of stricter federal mortgage rules on housing demand and prices.

“More broadly, the Bank continues to monitor the economy’s sensitivity to higher interest rates,” the release says. “Notably, household credit growth has decelerated for three consecutive months.”

The bank also nodded to the North American Free Trade Agreement (NAFTA) as “an important and growing source of uncertainty.” The latest round of talks wrapped Monday in Mexico City, with Canada and Mexico opposing U.S.-proposed protectionist including tariffs on steel and aluminum and a five-year sunset clause.

The Bank of Canada’s next interest rate announcement is scheduled for April 18, and will include its latest Monetary Policy Report and will assess how the recent federal budget affects the bank’s growth and inflation outlook.

Source: Bank of Canada