Published: Wed, July 11, 2018
Economy | By

'There are worries ahead': Experts react to Bank of Canada's rate hike

'There are worries ahead': Experts react to Bank of Canada's rate hike

The bank raised the rate even as it predicts larger impacts from the widening trade uncertainty, particularly after the United States imposed steel and aluminum tariffs on Canada and Ottawa's retaliatory measures. -Canada trade dispute would figure prominently in the bank's decision-making process for today's rate announcement.

The Bank said Canada's economy is operating "close to capacity", implying that it expects to see inflation rise in the future.

The bank said USA steel and aluminum tariffs imposed in June and retaliatory countermeasures by Canada in July would trim exports, imports and economic growth, and boost inflation, but strong global demand and higher commodity prices were offsetting the tariff headwind.

The Bank of Canada is also releasing its quarterly update of projections, which predicts slightly stronger growth in both 2019 and 2020, compared with its outlook in April. Household spending is being dampened by higher interest rates and tighter mortgage lending guidelines.

"Based on our interpretation of the bank's statement, we think that policymakers envisage a somewhat faster pace of tightening, but still think that disappointing data will persuade the governor to stand pat for some time and then, eventually, to force a reversal, with rates falling next year".

Poloz has followed a cautious, data-dependent approach in recent months and he hasn't touched the rate since raising it in January, a move that came after two earlier increases in the second half of 2017. The Bank estimates that underlying wage growth is running at about 2.3 per cent, slower than would be expected in a labour market with no slack.

CIBC chief economist Avery Shenfeld wrote in a research note Wednesday that "there are worries ahead, growth hasn't been stellar, but the backdrop has been just good enough for the Bank of Canada to nudge rates a quarter point higher".

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