The Bank of Canada (BoC) announced it hiked the overnight rate by 0.25% to 1.75% at today’s meeting. This is the third 0.25% hike by the BoC this year. As the economy continues to perform near its long-term potential, the BoC believes it will need to increase rates to a neutral level to achieve its inflation target of 1-3%. It currently estimates a neutral rate level to be in the range of 2.5%-3.0%.
The economy was described in upbeat terms as employment continued to grow and inflation remains above the BoC target of 2.0%. Trade headwinds have abated as a new U.S., Mexico, Canada trade agreement (USMCA) was announced at the end of September, pushing business confidence to higher levels. Although housing has slowed, consumer spending remains supported by steady income growth despite elevated levels of household debt.
The BoC removed the word “gradual” from today’s statement describing their pace of rate hikes. In the press conference, the hawkish impact of removing the word was downplayed as the BoC believes the word implied a pre-defined path to future rate hikes. By removing the word, every meeting in theory could now be in play for another rate hike, if the bank determines it is necessary.
The Monetary Policy Report that was released today shows only modest adjustments to gross domestic product growth expectations with 2018 and 2019 estimated to be 2.1%, before slowing to 1.9% in 2020.
The yield curve is flattening (short rates are rising more than long rates) after the release of the BoC statement. This reaction ties back to Invesco’s belief that the Canadian yield curve will continue to flatten longer term.
The next BoC meeting is scheduled for December 5, 2018.