Bank of Canada raises key interest rate to 1.5%

Bank of Canada raises key interest rate to 1.5%

Another hike this week would come with Canada facing a number of trade-related uncertainties, including NAFTA talks, US steel and aluminum tariffs and the threat of more duties on the economically critical automotive sector. The interest charged on this kind of debt typically goes up when the Bank raises its rate.

"You could call it holding off or you could call it following through on exactly what they said about being data-dependent, being cautious", said House, who said he expects Poloz to hike the rate Wednesday and then again once more this year, as well as another three times next year.

The rate increase, by a quarter of a percentage point, took the bank's overnight interest rate to 1.50 percent, still well below the "neutral" rate of 2.5-3.5 percent the bank sees as a sweet spot for monetary policy, where it neither boosts nor restrains growth.

The Bank of Canada says persistent trade uncertainty and Canada's tariff fight with the United States will shave almost 0.7 per cent from economic growth by the end of 2020 - but it predicts the blow to be largely offset by the positive impact of higher oil prices. Household spending is being dampened by higher interest rates and tighter mortgage lending guidelines.

Poloz also argued it should be clear that interest rate adjustments are "ill-suited" to counteract all the effects of protectionist measures, given how these trade actions affect multiple areas of the economy.

It was reasonable to think at the beginning of the year that the unknowns surrounding NAFTA talks could pause business investment and lead to a decline in activity, he said. It warns that "escalating trade tensions pose considerable risks to the outlook" at the global level.

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It expects real gross domestic product to grow 2.2% in 2019, up from its April call of 2.1%, and by 1.9% in 2020, compared with its previous prediction of 1.8%. Overall, the Bank still expects average growth of close to 2 per cent over 2018-2020.

Many economists anticipate several more hikes this year and in 2019.

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 Bank Rate is correspondingly 1 ¾ per cent and the deposit rate is 1 ¼ per cent.

National Bank of Canada experts wrote in a note to clients Wednesday that when it comes to future hikes Poloz may choose to err on the side of caution because of the threats of auto tariffs, which they warned, if applied, would have "unambiguously devastating economic impacts", particularly in Ontario.

The job market has improved as the country added 32,000 jobs in June. Temporary factors are causing volatility in quarterly growth rates: the Bank projects a pick-up to 2.8 per cent in the second quarter and a moderation to 1.5 per cent in the third.

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