The Bank of Canada (BoC) announced it would keep the overnight interest rate at 1.25% at today’s meeting. The outcome was not surprising as North American Free Trade Agreement (NAFTA) negotiations remain unresolved and economic growth in the first quarter showed signs of slowing down.
The statement released by the BoC acknowledged that inflation firmed in the first quarter, due to some temporary factors, and will remain modestly above or near 2% for the rest of 2018. Weaker first quarter GDP growth was attributed to weaker housing market activity and exports. New mortgage guidelines and other policy measures pulled housing activity forward into 2017. Both housing and exports are expected to rebound later in 2018 allowing GDP growth to reach 2% for 2018.
The Monetary Policy Report boosted the potential growth rate from 1.6% to 1.8% and described the economy as growing close to capacity with the labour market continuing to improve. The unemployment rate remains at a very low level historically, combined with improving wages and a decline in labour slack. The increases in minimum wages that took effect in 2018 are expected to cause a temporary boost to inflation. Trade policy remains an item of concern for the BoC.
Governor Poloz reinforced that higher interest rates will be warranted, but left little insight to when they may hike next. He also maintained that monetary policy accommodation will still be needed to keep inflation at their target.
We at Invesco Fixed Income believe today’s meeting should be positive for both stocks and bonds. The Canadian dollar’s initial reaction to the news was negative, but a potential quick resolution to the NAFTA negotiations could change that. Canadian 10-year yields should remain within their recent 2.10%-2.40% band that has existed this year.