Bright outlook

Policy is central bank’s first decision since the new trade deal with U.S. and Mexico

Central bank sounds positive note with rate increase,

OTTAWA— The Bank of Canada is raising its trend-setting interest rate as the resilient economy hums along and a big source of trade uncertainty is finally out of the way.

In making the decision Wednesday, the central bank also sent a signal that suggests it will take a more aggressive approach to future hikes.

The central bank delivered a quarterpoint rate increase for the fifth time since the summer of 2017 — and first time since July — to bring the benchmark to 1.75 per cent. The rate is now higher than it’s been in about a decade.

It was the central bank’s first policy decision since Canada agreed with the United States and Mexico earlier this month on an updated North American free trade deal.

“The new U.S.-Mexico-Canada Agreement (USMCA) will reduce trade policy uncertainty in North America, which has been an important curb on business confidence and investment,” the bank said in a statement on Wednesday.

“The Canadian economy continues to operate close to its potential and the

composition of growth is more balanced.”

The removal of one of the trade-uncertainty shackles also coincided with a notable change in the wording of the statement Wednesday, compared with other recent news releases from the bank.

This time around, the bank omitted the word “gradual” from its explanation on how it will approach future rate increases, a change that could lead some observers to anticipate future hikes will come faster than the market had previously expected.

Looking ahead, the bank indicated more increases will be needed to bring the rate to a “neutral stance” in order to keep inflation from rising too far above the 2 per cent midpoint of its target range. Governor Stephen Poloz’s team has pegged the neutral rate at between 2.5 and 3.5 per cent, so several more increases are likely on the way.

The statement, however, noted the pace of future increases will continue to be guided by how well households are digesting the higher interest rates, given their high levels of debt.

So far, the bank said Canadians have been making spending adjustments in response to earlier rate hikes and stricter mortgage policies — and credit growth continues to moderate.

“As a result, household vulnerabilities are edging lower in a number of respects, although they remain elevated,” the statement said.

The bank still expects consumer spending to continue expanding at a “healthy pace,” thanks in large part to the steady rise of incomes and high consumer confidence.