The Bank of Canada held its monetary policy meeting last week. As widely expected, the BoC Governor Stephen Poloz kept borrowing costs unchanged. Interest rates were steady as policymakers decide to wait for the outcome of the NAFTA negotiations with the United States.
However, officials maintained that gradual rate hikes would be required with the Canadian economy running at full capacity.
The BoC left the key interest rate unchanged at 1.50% last week as expected by the median forecasts. The BoC last hiked interest rates at the monetary policy meeting in July.
The Bank of Canada’s monetary policy statement introduced a new language in its report. It acknowledged that the accelerated pace of developments in the NAFTA negotiations was underway. However, the central bank noted that it was still unclear whether Canada would forge a new deal with the United States. Previously the U.S. and Mexico agreed on revamped trade agreements.
The BoC’s monetary policy statement said that it was “monitoring the course of NAFTA negotiations and other trade policy developments, and their impact on the inflation outlook closely.”
A clear outcome from the NAFTA deal remains the only obstacle for the BoC’s policymakers in pushing ahead with more interest rate hikes. The BoC has so far raised interest rates four times since it first started to hike rates in the middle of 2017.
No deal could potentially cast a shadow on the BoC as it will need to grapple with trade tariffs and further uncertainty.
The markets are currently forecasting as much as three rate hikes over the course of 2019. Expectations are now running high for the BoC to hike interest rates at the October monetary policy meeting.
The BoC said that besides trade, the overall picture of the Canadian economy was good enough to warrant a rate hike. Based on the BoC’s statement, the Canadian economy was seen operating at full capacity for a while.
It said that business investment and exports were rising solidly over the past several quarters and the housing market was also seen stabilizing. The BoC said that the financial stability risks were also moderating as employment gains continued to support household consumption.
The BoC’s statement also removed the phrase that appeared in its previous comment about the central bank monitoring the evolution of capacity. The removal was seen as rising confidence with the BoC about dissipating slack in the economy.
In this regards, the central bank said in its statement that ‘Recent data reinforce the Governing Council’s assessment that higher interest rates will be warranted to achieve the inflation target.”
The central bank also cautioned about the risks of overheating in the economy and called for a sense of urgency in hiking interest rates. Officials downplayed the spike in July’s consumer prices. It said that inflation is expected to move back toward the BoC’s 2% inflation target over the year ahead.
Most of the impact to the consumer inflation was seen from higher gasoline prices. Canada’s core inflation rate was seen sitting firmly at the two percent inflation target rate.
On wage growth, the central bank said that growth was moderate and that wages helped the economy to move carefully in line with its projections to the potential growth rate.
With the BoC engaged in a rate hike cycle, officials said that they were also closely monitoring the economy’s reaction to higher rates; a critical concern that was flagged by the BoC Governor, Poloz amid high debt levels.
The BoC’s statement came following other economic data. Canada’s trade surplus report showed a widening deficit with the United States. This was the highest since 2008. Canada’s trade surplus was a target of President Trump in the NAFTA talks.
According to official reports, the trade surplus rose to $5.3 billion in July compared to $4.1 billion just the month before. This came on the back of the U.S. slapping Canada with higher tariffs on steel and aluminum. Data showed that global exports were driven by the automobile and energy sectors, most of which were bound to the United States.
Canada’s exports rose 0.8% in July to $51.3 billion. Energy sector alone accounted for 5% of exports which was the highest since 2014, while automobiles increased 3.4%.