The Bank of Canada raised interest rates on Wednesday as expected and signaled more rate hikes to come, saying that while mounting trade tensions with the United States were a concern, their impact on growth and inflation looked modest so far.
The fourth rate increase since July 2017 and the bank’s relatively sanguine view of the trade risk boosted the Canadian dollar to its strongest in nearly four weeks, and economists said they expected the central bank to hike again by year end.
“At first blush, it’s a little bit more optimistic or hawkish than I would have expected – there’s nothing particularly shocking here, but just generally the tone is one of mild concern about the trade front,” said Doug Porter, chief economist at BMO Capital Markets.
“The overall impression is one of onward and upward and this isn’t necessarily the last rate hike of the year.”
The rate increase, by a quarter of a percentage point, took the bank’s overnight interest rate to 1.50 percent.
While the bank said mounting trade tensions with the U.S. would have a larger impact on investment and exports than previously thought, it nudged up its estimate for second-quarter economic growth and pointed to rising inflation pressures.
The central bank said tit-for-tat tariffs imposed by the United States and Canada would cause some difficult adjustments for industries and workers, but that the impact of the tariffs on growth and inflation was expected to be modest.
The bank tweaked its standard language on future rate hikes, saying that while it would take a gradual approach guided by data, it was monitoring the economy’s adjustment to higher rates, the evolution of capacity and wage pressures as well as “the response of companies and consumers to trade actions.”
Pointing to a stronger-than-expected U.S. economy, the bank boosted its estimate of Canadian second-quarter growth to 2.8 percent from 2.5 percent forecast in April, but said growth would slow to 1.5 percent in the third quarter.
Inflation was expected to pick up to about 2.5 percent before settling back to 2 percent by the second half of 2019, the bank said, while wage growth was running at about 2.3 percent, “slower than would be expected in a labor market with no slack.”
While temporary factors were causing volatility in quarterly growth rates, the bank said it expected the economy to expand by about 2 percent on average over the next two years. Exports were being buoyed by strong global demand and higher commodity prices, it noted.