The Bank of Canada is once again keeping its key interest rate target steady at 1.25 per cent. The scheduled announcement was as expected but the statement that follows is leading many to believe that the Central bank will raise rates in its next scheduled announcement in July.
The BoC says “global economic activity remains broadly on track with the Bank’s April Monetary Policy Report (MPR) forecast.” It adds that recent data points to some upward outlook on the U.S. economy as well.
In its statement, the Bank does warn that “ongoing uncertainty about trade policies is dampening global business investment and stresses are developing in some emerging market economies.” There is still concern about the ongoing NAFTA talks with the U.S. and how the outcome – negative or positive – will affect our economy.
Rate hike definitely impending
Aside, growth remains at around two per cent, which is consistent with an economy operating close to full capacity.
The Bank also pointed out, “global oil prices have been higher than assumed in April, in part reflecting geopolitical developments. Inflation in Canada has been close to the 2 per cent target and will likely be a bit higher in the near term than forecast in April, largely because of recent increases in gasoline prices. Core measures of inflation remain near 2 per cent, consistent with an economy operating close to potential. As usual, the Bank will look through the transitory impact of fluctuations in gasoline prices.”
All of this signals that the Bank is ready to raise rates in the near future, as the economy seems to have the ability to manage one.
Response to announcement
The Canadian dollar was trading higher in reaction to the announcement. And economists are reacting to this expected announcement and unexpected change in tone.
The central bank’s statement had “a hawkish tone, suggesting the next rate hike is not far off,” said TD Bank senior economist Brian DePratto. “All told, the positives seem to outweigh the negatives,” DePratto wrote in a note to clients.
“Gone was the reference to ‘caution’ that typified the last few statements. Today’s statement instead chose the term ‘gradual’ to describe the approach to policy adjustments. Importantly, interest rate sensitivity and the evolution of economic capacity remained areas of particular focus.”
Effect on Canadians
The rate remaining steady is good news for anyone with a variable rate mortgage or money borrowed from a line of credit. Their cost of borrowing should not change as banks are unlikely to hike prime yet again anytime soon. But the indication is clear that money is going to get more expensive, soon. For anyone worried about their ability to service their loan, making lump-sum payments now will ease the pain of a hike later.
The Bank of Canada’s next scheduled interest rate decision is set for July 11 when it will also update its outlook for the economy and inflation in its Monetary Policy Report.