Although the Bank of Canada (BoC) stuck with its trend-setting interest rate Wednesday, it offered fresh, yet cautious, warnings to Canadians that increases are likely on the way.
The central bank has now left the rate locked at 1% for two straight policy announcements after the strengthening economy prompted it to raise it twice in the summer.
In announcing the decision, the BoC pointed to several recent positives that could support higher rates in the coming months. They included encouraging job and wage growth, sturdy business investment and the resilience of consumer spending despite higher borrowing costs and Canadians’ heavy debt loads.
On top of that, there’s increasing evidence in economic data that the benefits from government infrastructure investments have begun to work their way through the economy, the bank said.
On the other hand, the bank noted exports have slipped more than expected in recent months after a powerful start to the year, although it continues to predict trade growth to pick up due to rising foreign demand.
The BoC also said the international outlook continues to face considerable uncertainty mostly because of geopolitical- and trade-related factors.
“While higher interest rates will likely be required over time, [the bank’s] governing council will continue to be cautious,” the BoC said in a statement that accompanied its decision.
Specifically, the BoC’s governing council will be “guided by incoming data in assessing the economy’s sensitivity to interest rates, the evolution of economic capacity and the dynamics of both wage growth and inflation.”
Inflation, a key factor in the BoC’s interest rate decisions, has been slightly higher than anticipated and could stay that way in the short term because of temporary factors such as stronger gasoline prices, the central bank said. Core inflation, which measures underlying inflation by omitting volatile items like gas, has continued to inch upward.
BoC Governor Stephen Poloz raised interest rates in July and September in response to an impressive economic run that began in late 2016. The interest rate hikes took back the two cuts he introduced in 2015 to help cushion, and stimulate, the economy from the collapse in oil prices.
From here, the BoC must assess how to proceed with the interest rate while taking into consideration that Canadian households have amassed high levels of debt and the presence of still-hot housing markets in areas such as Toronto and Vancouver.
Last month, the BoC flagged the steady climb of household debt and these real estate markets as the financial system’s top vulnerabilities.
The central bank’s statement Wednesday said recent economic indicators have been in line with its October forecast, which projected a moderation following the country’s exceptional growth in the first half of 2017.
The document contained a few differences compared with the statement that accompanied its last rate announcement in October.
This time, the BoC once again noted the unknowns over the future of trade policy, however, it did not specifically mention the ongoing renegotiation of the North American Free Trade Agreement.
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