Invesco Canada blog

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Brian Schneider | January 17, 2018

BoC hikes again, citing near-capacity growth

The Bank of Canada (BoC) announced today it was raising the target overnight rate by 0.25% to 1.25%. The last time the BoC hiked its target rate was at the September 6 meeting. Market expectations for this rate hike began to increase several weeks ago, so it was almost fully priced into the market.

The impetus behind the rate hike was continued strong growth that puts the economy closer to capacity. The positive data includes strong employment growth, increasing business investment and inflation that is near target. The BoC cautioned that there are several concerns that warrant continued monetary accommodation including, weaker than expected export activity and ongoing negotiations of the North American Free Trade Agreement (NAFTA).

The Monetary Policy Report (MPR) released at the meeting shows growth expectations slowing from 3% in 2017, to 2.2% in 2018 and 1.6% in 2019, largely on the back of a slowdown in consumer consumption growth, while projected inflation increases to 2.0% in 2018 and 2.1% in 2019.

This rate hike could be described as a dovish hike, as the BoC remains concerned that raising policy rates too quickly could cause the expansion to stall. However, the reduced growth expectations of the BoC seem somewhat overblown given global growth continues to expand.

In Invesco’s opinion, the risks to Canadian growth seem skewed to the upside. Any positive data surprises will be reflected in higher interest rates. The Canadian dollar has appreciated quickly since the third week of December and may be due to consolidate around current levels.

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