Canada’s central bank has increased the overnight rate for the third time this year, up 25 basis points compared with July.
The rate is now 1.75%, which is a full 75 basis points higher than where it stood at the beginning of the year, bringing it to the highest level since 2008.
A “solid” global outlook and a “robust” economy in the United States were cited as reasons for the increase, with the US-Mexico Canada Agreement reducing trade policy uncertainty and boosting the outlook for investment spending in Canada. Trade conflict between the U.S. and China continue to weigh on expectations, however.
The Bank has increased its forecast for the Canadian economy, saying it expects growth of around 2.1% this year, compared with 2% in its previous forecast. It downgraded the forecast for 2019 growth from 2.2% to 2.1%.
“The downgrade to 2019 reflects a few moving parts; business investment is now expected to be a larger contributor to growth, while consumption was downgraded a bit and inventory destocking also plays a role,” said Brian DePratto, senior economist at TD Economics.
Household spending is expected to remain steady due in part to favourable employment growth. Household credit growth is moderating due to rising interest rates.
CPI inflation fell to 2.2% in September, and it is expected to remain close to the 2% target level until the end of 2020.
Analysts are saying the hike was no surprise and are describing the tone of this morning’s announcement as more “hawkish” than expected, with the removal of the reference to “gradual” rate hikes ahead and instead saying the rates have to climb to a “neutral” level, which according to the Bank is around 2.5-3.5%.
This comment, said CIBC Economics’ Avery Shenfeld, hints at another increase in December that will likely bring the overnight rate to 2%.
“That’s more hawkish than we see as the likely outcome, as we’re not optimistic on the economy’s ability to weather that dose of tightening, and note that the Bank will still ‘take into account how the economy is adjusting,’” Shenfeld said in a note to investors.
“But we’ll need the evidence of growth running no faster than 2% for the Bank to come around to our view.”
The Canadian dollar rallied slightly on the news, increasing about two-tenths of a cent and reaching 76.90 cents U.S. as of press time.
@EmmaHampelBIV
