The Bank of Canada held its monetary policy meeting last week. Interest rates were left unchanged at 1.25% as widely expected. But, the central bank surprised by signaling that the next rate hike could be coming soon despite uncertainties surrounding global trade.
The BoC has hiked interest rates three times since mid last year. This came after years of interest rates being pushed to historic lows amid the supply glut in Oil prices. However, improving conditions in the market along with a pick up in oil prices put the BoC back on a rate hike cycle.
Officials however maintain that they remain mindful of the concerns especially regarding high household debts in the Canadian economy.
In its monetary policy statement, the BoC sounded very positive about the domestic outlook for Canada. It said that the first quarter data was stronger than initially anticipated and also acknowledged the fact that various measures of inflation put consumer prices near the 2% inflation target rate.
“Recent data point to some upside to the outlook for the U.S. economy,” the Bank of Canada said. “At the same time, ongoing uncertainty about trade policies is dampening global business investment and stresses are developing in some emerging market economies.”
The central bank also sounded somewhat optimistic regarding the trade discussions with the United States, Canada’s largest and closest trading partner. The central bank said that relations were improving and it expects to see a favorable close to the trade negotiations.
The BoC left rates unchanged as negotiations stalled between the U.S. and Canada on the North American Free Trade Agreement (NAFTA). This came mostly due to the difference on opinion on the automotive industry. At the same time, Canada’s exemption limit on the steel and aluminum tariffs also expired last Friday. Following this, President Trump said that he would consider imposing new tariffs on vehicle imports and automotive parts which could further dampen the outlook for Canadian exports.
Assessing its outlook, the Bank of Canada said that the overall developments since its last meeting in April showed that higher interest rates were required in order to keep a check on inflation. The central bank noted that it would maintain a gradual approach to hiking interest rates and would give due forward guidance for the markets.
The central bank also maintained that it would continue to assess incoming economic data before taking a decision on rate hikes.
Talking about exports, the BoC said that exports grew at a healthy pace in the first quarter of the year and also noted that machinery and equipment imports suggested that Canadian firms were on track to increase the investments.
The housing market which remains a key concern amid higher lending rates was seen to have fallen sharply in the first quarter. This came amid tougher mortgage lending rules.
“Going forward, solid labor income growth supports the expectation that housing activity will pick up and consumption will continue to contribute importantly to growth in 2018,” the central bank said.
The markets saw the BoC’s statement as being hawkish and expectations quickly grew that the BoC could continue with its rate hikes later this year. The estimate on the next BoC rate hike puts July as the likely time frame for Canadian interest rates to rise.
Most notably, the word “cautious” was removed from the central bank’s statement when describing its approach to rate hikes. The central bank also removed other words such as “over time” signaling that rate hikes could resume once again.
The hawkish monetary policy statement sent the Canadian dollar surging on the day when the USD was seen easing back after posting strong gains earlier in the week.