The Bank of Canada rate hike kicked off the New Year with an interest rate lift of 25 basis points. The rate hike by the Bank of Canada was widely expected by economists and the markets priced in the event too.
The hawkish estimates came after the economic data from December 2017 showed that exports had improved for a second consecutive month. Most importantly, Canada’s labor market showed signs of diminishing slack as the unemployment rate fell and the economy was seen adding strong job numbers during the month.
BoC Governor Poloz conceded that the Bank of Canada rate hike was a “no-brainer” during the press conference while stressing that policy changes were data dependent.
The BoC had left interest rates unchanged in December and struck a dovish tone in the markets back then. Last week’s rate hikes mark the third increase in interest rates since the central bank started to hike rates from summer last year. This was the third Bank of Canada rate hike since then with the second coming in September 2017.
In its monetary policy meeting, the central bank pointed to the strong economic indicators as the reason for its rate hike. However, the central bank was seen balancing its hawkish forward guidance by heavily talking about the uncertainty surrounding the NAFTA deal.
The North American Free Trade Agreement or NAFTA for short came into focus after the U.S. President Trump dubbed the deal as being unfair to the United States. Canada, as part of the NAFTA agreement exports most of its goods and services to the U.S.
A threat to the free trade agreement could potentially hit Canadian exports very strongly. The central bank expressed concerned on the impact on business investment in Canada.
Despite pointing to the NAFTA deal as an uncertainty, the BoC maintained a hawkish stand. It signaled that further rate hikes are likely over time and focused on the growth and other economic indicators.
BoC’s Poloz, in the press conference said, “Of course, the big cloud over the forecast as well as our discussion is, well, NAFTA,” underlining the fact that the central bank was closely monitoring the developments on the trade agreements.
Poloz however tried to brush down the central bank’s concerns by saying that the demise of NAFTA might not be as bad as expected. “We can’t just relax and assume that it would be a small shock,” he said.
In its monetary policy statement, the BoC said that “some continued monetary policy accommodation will likely be needed.” The central bank said that despite it expecting to hike rates over time, it would remain cautious and further policy changes will depend on assessing the incoming economic data.
Following the Bank of Canada rate hike, some of the big banks in Canada hiked the prime rates. This leads to higher borrowing costs for mortgages and loans. At the same time, this was welcome news as the BoC laid down strict rules in the housing market.
The central bank expects lower investment by 2% by end of 2019 attributing this to trade policy uncertainty. The central bank also said that the new tax reforms recently implemented could encourage Canadian firms to redirect their business investment across the border.
The Canadian dollar did not react much to the news, although the volatility in the USDCAD currency pair was evident. Following the rally in the USDCAD since November and December last year, the currency pair began to drift lower.
For the moment, there are early signs that the USDCAD could be forming a bottom at the current levels of C$1.2410. The bias could shift to the downside confirming the resumption of the downtrend on a weekly close below this level.