The Bank of Canada held interest rates steady on Wednesday, as expected, but dropped cautious language about future rate moves in a signal that higher borrowing costs are on the way.
While the central bank noted uncertainty about trade policy and stresses in emerging market economies, it dropped oft-repeated language pledging a cautious approach to setting monetary policy, suggesting gradual rate hikes will soon resume.
“Overall, developments since April further reinforce Governing Council’s view that higher interest rates will be warranted to keep inflation near target. Governing Council will take a gradual approach to policy adjustments, guided by incoming data,” the bank said in a statement.
The closely watched statement dropped previous references to rate increases being warranted “over time” and removed a phrase about “some monetary policy accommodation” still being needed to keep inflation on target.
The bank noted some upside to the outlook for the U.S. economy and said exports of goods have been more robust than forecast, with data on imports of machinery and equipment suggesting a continued recovery in investment. It also said that while housing resale activity has been soft, income growth supports the expectation that housing activity will pick up and consumption will boost growth in 2018.
The bank has raised rates three times since July 2017, most recently in January, but has been on hold since then amid uncertainty about the renegotiation of the North American Free Trade Agreement and concern about the impact of higher borrowing costs on Canada’s heavily indebted households.
It said global activity remains “broadly on track” with its April forecast, with uncertainty about trade dampening global investment and global oil prices higher than expected, in part reflecting geopolitical developments.
The bank noted that inflation has been close to its 2 percent target and “will likely be a bit higher” in the near term than forecast in April, largely because of increases in gasoline prices.
“Core measures of inflation remain near 2 percent, consistent with an economy operating close to potential,” it said, noting that it will look through the transitory impact of gas price fluctuations.
The bank said economic data since April support its outlook for economic growth around 2 percent in the first half of the year, with exports of goods more robust than forecast and housing resale activity remaining soft into the second quarter.