Bank of Canada keeps key interest rate target on hold

The Bank of Canada kept its key interest rate target on hold Wednesday, but noted the Canadian economy was a little stronger than expected in the first quarter, raising expectations that rate hikes are coming later this year.

The central bank held steady its target for the overnight rate — a key financial benchmark that influences the prime lending rates at the country’s big banks — at 1.25 per cent.

However, economists said the Bank of Canada’s decision to drop a reference to remaining “cautious” signalled a more hawkish tone and suggested that the next rate increase would be soon.

“All told, the positives seem to outweigh the negatives,” TD Bank senior economist Brian DePratto wrote in a note to clients.

“Gone was the reference to ‘caution’ that typified the last few statements. Today’s statement instead chose the term ‘gradual’ to describe the approach to policy adjustments.”

The Bank of Canada’s next scheduled interest rate decision is set for July 11 when it will also update its outlook for the economy and inflation in its monetary policy report.

In announcing its decision Wednesday, the central bank said exports were more robust than forecast as data on imports of machinery and equipment suggest continued recovery in investment, but also pointed to softer real estate activity into the second quarter as the market “continues to adjust to new mortgage guidelines and higher borrowing rates.”

“Going forward, solid labour income growth supports the expectation that housing activity will pick up and consumption will continue to contribute importantly to growth in 2018,” it said.

The Bank of Canada also said global economic activity remains broadly on track, but added that ongoing uncertainty about trade policies is dampening global business investment and stresses are developing in some emerging market economies.

It noted that recent developments have reinforced its view that higher rates will be warranted to keep inflation near its target, but added that it will take a gradual approach and be guided by the economic data.

“In particular, the bank will continue to assess the economy’s sensitivity to interest rate movements and the evolution of economic capacity,” it said.

Alicia Macdonald, principal economist at the Conference Board of Canada, has been expecting since January that the Bank of Canada will raise its key interest rate in July.

She said Wednesday that there’s now a possibility the central bank may also increase the rate in September or October, but that will depend on what happens with the trade talks with the United States and Mexico.

“We think there’s reason to still think they might be cautious as they wait for these events to unfold,” she said.