Canadian Interest Rates Frozen, But Not For Long

The Bank of Canada’s interest rate is staying at 1.25 percent. Stringent mortgage rules and fewer exports resulted in slower first-quarter growth of about 1.3 percent. The bank had foreseen economic growth of 2.5 per cent during that period, reported The Star.

“The economy is in a good place,” Bank of Canada Governor Stephen Poloz said at a press conference, explaining that inflation has already reached the central bank’s 2 percent target. Still, “there is a long list of things that are in the background preventing the economy from getting all the way where it is today all by itself.”

The bank expects the second quarter to grow to 2.5 percent, partially due to rising foreign demand, which will result in 2 percent overall growth for all of 2018.

“Canada’s economic growth has moderated, and the economy is operating close to capacity,” the bank explained in a monetary policy report. “While a moderation was anticipated, temporary factors … are resulting in sizable short-term fluctuations in growth.”

Interest-rate hikes will likely occur in the future, according to the bank.

“Some progress has been made on the key issues being watched closely by governing council, particularly the dynamics of inflation and wage growth,” the bank’s statement said. “This progress reinforces governing council’s view that higher interest rates will be warranted over time, although some monetary policy accommodation will still be needed to keep inflation on target.”

The bank will keep monitoring the economy’s susceptibility to higher interest rates and how it increases capacity through investment, reported The Star. This will allow the country to grow without increasing inflation. According to the bank, the economy has made advances in building capacity.

“The Bank anticipates that Canadian exports will strengthen as foreign demand increases, but not sufficient to recover the ground lost during recent quarters,” the bank stated. “Export growth is being increasingly limited by capacity constraints in some sectors. Continued gains in business investment should build additional capacity in those sectors and in the economy more generally. However, both exports and investment are being held back by ongoing competitiveness challenges and uncertainty about trade policies.”

Tax reforms in the United States will impact growth in Canada, whose gross domestic product is predicted to be 0.2 percent lower by the end of 2020, noted The Star. Decreased investment and trade uncertainties will also affect exports. They will be offset by fiscal stimulus in provincial budgets, resulting in the addition of 0.4 percent to Canada’s real GDP by the end of 2020.

“Some progress has been made on the key issues being watched closely by Governing Council, particularly the dynamics of inflation and wage growth,” the bank stated. “This progress reinforces Governing Council’s view that higher interest rates will be warranted over time, although some monetary policy accommodation will still be needed to keep inflation on target. The Bank will also continue to monitor the economy’s sensitivity to interest rate movements and the evolution of economic capacity. In this context, Governing Council will remain cautious with respect to future policy adjustments, guided by incoming data.”

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