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Bank of Canada Hikes Rates By 25bps, Loonie Rises On Hawkish Take

The Bank of Canada raised the overnight rate by 25bps to 1.5%, in line with consensus estimates.

In justifying the move, the Bank said it expects the global economy to grow by about 3.75% in 2018 and 3.5% in 2019, adding that the US economy is proving stronger than expected, reinforcing market expectations of higher policy rates and pushing up the US dollar. It warned that this is “contributing to financial stresses in some emerging market economies” suggesting that Canada was dragged into the rate hikes rather than welcoming it.

In other words, the BOC hopes that demand from the U.S. will trump the drag on trade from tariffs the two neighbors, as well as the uncertainty over the future of Nafta.

It also noted that while oil prices have risen, the Canadian dollar is lower, reflecting broad-based US dollar strength and concerns about trade actions, noting that “the possibility of more trade protectionism is the most important threat to global prospects.”

Perversely, even as the BOC hiked rates, it warned that household spending is “dampened by higher interest rates and tighter mortgage lending guidelines.”

Curiously, despite market concerns, the BOC raised its Q2 GDP forecast to 2.8% from 2.5% previously, with Q3 seen at 1.5%; The bank also raised the potential output growth to 1.8% in 2018, and 1.9% in 2019 and 2020.

Commenting on the ongoing trade war with the US, the BOC estimates US tariffs on steel and aluminium will reduce level of real Canadian exports by 0.6%, with the impact expected to be felt in H2 2018. Meanwhile, Canadian counter measures estimated to reduce real imports by 0.6% starting Q3, while tariffs will temporarily boost inflation in Q3 2019.

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