In a statement analysts are describing as “hawkish,” the Bank of Canada announced May 30 it is holding the overnight rate target at 1.25%, where it has sat since January.
Canada’s central bank said Canadian economic activity in the first quarter of the year was “a little stronger than projected” but maintains its forecast for 2% growth throughout 2018. Goods exports were stronger than expected, and the outlook for business investment looks positive as indicated by an increase in imports of machinery and equipment.
“The statement was much more hawkish than the market anticipated, especially after the early week global financial market gyrations,” Benjamin Reitzes, Canadian rates and macro strategist, BMO Capital Markets, said in a note to investors.
“This is a clear warning shot that a July rate hike is solid possibility.”
Reitzes said in addition to expecting a rate increase in July, another hike in October remains a possibility.
Oil prices have also grown higher than anticipated in the last forecast. Inflation remains near the 2% target, and the Bank said it expects it to be a bit higher “in the near term” than forecast in April due to increases in gas prices.
Global economic activity remains in line with the Bank of Canada’s expectations as published in April’s forecast. The outlook for the U.S. economy is brighter than previously forecast, but trade policy uncertainty is hampering global business investment.
In its statement, the Bank said it plans to take a “gradual approach” to adjustments in policy.
“Overall, developments since April further reinforce Governing Council’s view that higher interest rates will be warranted to keep inflation near target,” it said in the statement.
“In particular, the Bank will continue to assess the economy’s sensitivity to interest rate movements and the evolution of economic capacity.”
The Canadian dollar gained almost a full cent relative to the U.S. greenback after the morning’s news, reaching 77.8 cents U.S. as of press time.
The next rate forecast is scheduled for July 11.
@EmmaHampelBIV
