Bank of Canada Maintains Target Overnight Rate at 1.5%

Jane Switzer
by Jane Switzer September 5, 2018 / No Comments

In its latest monetary policy decision, Canada’s central bank announced Wednesday its benchmark interest rate will remain at 1.5%.

The bank has gradually hiked its target overnight lending rate four times since mid-2017 – most recently in July – after nearly seven years of ultra-low rates and no increases.

“Activity in the housing market is beginning to stabilize as households adjust to higher interest rates and changes in housing policies,” the Bank of Canada said in a press release. “As past interest rate increases work their way through the economy, credit growth has moderated and the household debt-to-income ratio is beginning to edge down.”

Both the global and Canadian economies are evolving in line the bank’s last projections in July. Core inflation remained at 2%, reflecting an economy “running at near capacity for some time.” Airfare pushed consumer price index (CPI) inflation higher than expected to 3% in July, but is expected to ease down to 2% in 2019 “as the effects of past increases in gasoline prices dissipate.” Gross domestic product (GDP) growth hit 2.9% in the second quarter as projected, but is expected to slow as energy production and exports fluctuate.

The bank acknowledged “elevated trade tensions” as an ongoing risk to the global outlook as Canada the United States continue to wrestle over renegotiating the North American Free Trade Agreement (NAFTA). After more than a year of volleying over a number of issues including auto parts, dairy supply management, and most recently, dispute resolution and cultural exemptions, negotiators are facing a time crunch to secure a deal before the U.S. midterm elections in early November and before Mexico’s new president takes office on Dec. 1.

While uncertainty around trade policies is depressing commodity prices, the bank reports that demand is swinging in a different direction.

“Despite choppiness in the data, both business investment and exports have been growing solidly for several quarters,” the bank said.

As always, the bank reiterated that it’s “guided by incoming data” and continues to monitor the economy’s reaction to higher interest rates. However, it said higher interest rates will likely be needed to achieve its inflation target. The Bank of Canada faces two remaining policy interest rate decisions in 2018. The next announcement is scheduled for Oct. 24, and will include the bank’s latest economic and inflation outlook in its quarterly Monetary Policy Report.

Source: Bank of Canada