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Bank of Canada holds overnight rate steady at 1.5%

As expected, the Bank of Canada announced September 5 it is holding the overnight interest rate steady at 1.5%, where it has sat since July 11, as trade uncertainties loom just as NAFTA negotiations are resuming.
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Bank of Canada plaza, Ottawa | Shutterstock

As expected, the Bank of Canada announced September 5 it is holding the overnight interest rate steady at 1.5%, where it has sat since July 11, as trade uncertainties loom just as NAFTA negotiations are resuming.

CPI inflation was 3% in July, which was higher than expected. According to BMO Capital Markets’ Canadian rates and macro strategist Benjamin Reitzes, this was largely dismissed as a blip because it was due in large part to a jump in spending on air travel. The Bank said it expects inflation to dip back down to closer to 2% early next year.

“Just to reinforce they have little angst on inflation, [the Bank notes] that ‘wage growth remains moderate,’” Reitzes said in a note to investors. “Note that the Bank dropped their mention of watching the evolution of capacity and wage pressures from the concluding paragraph.

“Perhaps that was to increase emphasis on NAFTA concerns.”

The Canadian economy continues to evolve as expected. The country had seen growth of 2.9% in Q2 after an increase of 1.4% in the previous quarter; this growth is expected to slow in Q3 because of fluctuations in energy production and exports.

The Bank said business investment and exports are still increasing, as they have been for the past several quarters, even as trade uncertainties dampen expectations. Housing market activity is stabilizing as Canadians are adjusting to new housing policies and higher interest rates. Credit growth is slowing and the household debt-to-income is starting to decrease.

The rate is expected to increase in the near future.

In its rate announcement, the Bank said, “Recent data reinforce governing council’s assessment that higher interest rates will be warranted to achieve the inflation target. We will continue to take a gradual approach, guided by incoming data.”

The Bank said it will continue to watch the effects of higher interest rates on economic growth. As well, it is following the NAFTA negotiations and other trade-related developments.

Reitzes called today’s announcement “an even keel statement,” pointing out the Bank said it expects rates will increase assuming no large, unexpected changes to the Canadian economy.

“Assuming all goes well with NAFTA (perhaps a big assumption) and the data over the next seven weeks, an October rate hike still looks like a reasonable expectation.”

The Canadian dollar didn’t react much on the news; as of press time, it had dipped about one-tenth of a cent relative to the U.S. dollar, settling around 75.8 cents U.S.

The next rate announcement is scheduled for October 24.

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@EmmaHampelBIV