Bank of Canada planning to increase rates in July?
The Bank of Canada announced this week that its benchmark rate is staying the same at 1.25 per cent.
Policy meeting was called this Wednesday to address concerns over the slowing housing market and stalled NAFTA negotiations. Once again, the Bank of Canada left its rate unchanged. However, the tone of the statement was such that experts immediately concluded that a rate hike is likely in the next months. As long as the economy keeps strong and the markets stabilize, Bank of Canada will likely raise its benchmark rate in July.
The Bank of Canada raised its rate three times since the last summer.
The most recent rate increase happened in January of 2018. Each time rate increased by 0.25 per cent. Benchmark interest rate was on hold since January, largely because of the uncertainty around the North American free trade agreement. Currently there is less concern over Donald Trump withdrawing from NAFTA, and the economy is steadily growing.
The language that BoC used in its statements was more explicit than usual. The governing council stated that higher interest rates are likely needed to keep inflation near its target. They mentioned that gradual approach to policy adjustments would be taken. Nonetheless, experts believe that the odds of July rate increases are as high as 80 per cent.
The BoC statement is being interpreted as a call to increase rates in July.
BoC representatives reassured that all decisions will be cautiously weighed against latest economic trends. It was stated that the inflation is creeping up closer to its per cent target, and BoC will need to act fast to keep it in check. BoC uses interest rate manipulations as a tool to keep inflation near or under 2 per cent. When prices exceed that threshold, BoC raises its target rate to bring them back down. The bank’s most recent forecast placed inflation at 2.1 per cent mark, and economic growth at 1.3 per cent. Action will likely be taken in the near future to keep inflation under its target.
Stephen Poloz, the governor of BoC, pointed at several signs of emerging economic strength for Canada. The Canadian economy was a little stronger than expected in the first quarter of 2018. Increasing oil prices, growth in the labour income and robust export of goods benefitted the economy. However, housing activity was unchanged, as the market keeps adjusting to new mortgage rules and the stress test. The house prices are cooling and sales of existing homes dropped by nearly 3 per cent in April compared with last April.
BoC mentioned that a hike in interest rates would affect the housing market as well. Recovery in the housing acitivity and consumption is expected to further strengthen the economic growth. Next rate decision is coming on July 11, along with the release of quarterly economic forecast of 2018. Many economists expect BoC to increase its rate from 1.25 per cent tp 1.5 per cent on that date and perhaps again some time in 2018.
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