Following recent upbeat comments, the Bank of Canada (BoC) announced today that it would hike the overnight target rate to 0.75% from 0.50%. This is the first rate hike since 2010, as the BoC has become confident that the current “above potential growth” will continue, leading it to take back one of two emergency rate cuts enacted in 2015.
The statement recognized a broadly stronger Canadian economy as the primary reason leading to the rate hike. The BoC believes growth is broadening across both provinces and industries, leading to a sustainable recovery. Growth has been driven by the household sector, which has shown increased spending across the goods and services sectors as employment and wages have risen. Additionally, both exports and business investment have also shown positive signs.
Bank Governor Stephen Poloz was asked at the press conference what has changed since the last meeting and why the BoC decided to hike rates even as inflation was showing signs of slowing. He responded that the pickup in growth across industries and regions led the BoC to view the recent signs of growth as sustainable, leaving the country with less excess capacity to be absorbed. In addition, he expressed that inflation is expected to return to near the 2% target by 2018, as the recent decline in inflation proves temporary.
The BoC Monetary Policy report showed the Bank’s projections for growth in Canada have been revised upward to 2.8% from 2.6% in 2017 and to 2.0% from 1.9% in 2018. The Consumer Price Index forecast has also been increased to 1.8% in 2018 and to 2.1% in 2019.
In our view, risks regarding uncertainty in trade and investment remain, but the optimism shown by the BoC at today’s meeting should allow the Canadian dollar to continue its recent strengthening trend and should also continue to push yields higher.