Vancouver Sun

BoC hints hawkish moves are ahead

- CRAIG WONG

OTTAWA 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.

Macdonald also said she’ll be watching what happens with the housing market, which she said the Bank of Canada expects to rebound over the rest of this year.

The central bank’s decision to keep its trendsetti­ng rate on hold came as inflation sits above the two per cent midpoint of its target range of one to three per cent and core inflation has crept past the two per cent mark for the first time since 2012.

It noted that inflation will likely be a bit higher in the near term than was forecast in its April monetary policy report due to recent increases in gasoline prices, but that it will look through the transitory impact of the fluctuatio­ns at the pump.

 ?? GEOFF ROBINS/AFP/GETTY IMAGES/FILES ?? The Bank of Canada notes that recent developmen­ts have reinforced its view that higher interest rates will be warranted to keep inflation near its target. It added that it will take a gradual approach and be guided by the economic data.
GEOFF ROBINS/AFP/GETTY IMAGES/FILES The Bank of Canada notes that recent developmen­ts have reinforced its view that higher interest rates will be warranted to keep inflation near its target. It added that it will take a gradual approach and be guided by the economic data.

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