Eight times per year, the Bank of Canada meets to determine what the base lending rate should be. Any change to this industry benchmark indicates a possible change to corresponding rates, such as interest rates for mortgages and additional types of consumer loans. This information is also a good indicator of the current status of the Canadian economy.
The Bank of Canada announced an increase to their overnight lending rate this morning, up by 0.25 points to 1.75 percent. The highly anticipated move marks the third hike to the central Bank’s trendsetting rate this year, and the fifth increase since July 2017.
The Bank’s aim when increasing their key rate is to prevent excessive inflation, as high borrowing costs tend to slow down economic activity. This is the first time the rate has been above 1.5 percent since December 2008.
According to the Bank, "household spending is expected to continue growing at a healthy pace, underpinned by solid employment income growth. Households are adjusting their spending as expected in response to higher interest rates and housing market policies." We can expect housing activity across the country to continue stabilizing in this respect. Notably, the new US-Mexico-Canada trade agreement (USMCA) is expected to reduce trade policy uncertainty throughout the continent. The central Bank will be closely monitoring how the USMCA will impact confidence and stimulate business investment within Canada.
Average growth in the Canadian economy is expected to hover around 2 percent in the latter half of this year. Projections for Canada’s GDP include growth of 2.1 percent between 2018 and 2019 before tapering off to 1.9 percent in 2020. CPI inflation dropped to 2.2 percent last month, which the Bank attributes to reversal of the summer spike in Canadian airfare. Additional factors pushing up inflation - such as high gasoline prices and increases in minimum wage - are expected to be mitigated by early 2019. The Bank projects inflation to remain close to the 2 percent target through to the end of 2020.
The general consensus between Canadian Economists indicates that we can expect further rate hikes in the near future; however, the Bank has stated that "Governing Council will continue to take into account how the economy is adjusting to higher interest rates, given the elevated level of household debt" when determining the pace of these increases.
The final rate announcement for 2018 will take place on December 5, while the next Monetary Policy Report and the first rate announcement of the new year will be published on January 9, 2019.
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