Canadian conundrum

The Canadian economy is in good shape. Governor of the Bank of Canada (BoC), Stephen Poloz, is therefore in a difficult situation. With favourable economic data on one side and a potential trade war with its largest commercial partner on the other, economic policy lies in the grey zone. With inflation above BoC’s 2% target, wage growth largely exceeding consumer price indices, unemployment at a decade low and, most importantly, an economic expansion above the 2.2% projections from the Canadian monetary authority, the odds would most certainly support further monetary policy tightening.

However, uncertainties regarding further trade sanctions from the US remain. The North American Free Trade Agreement (NAFTA) renegotiations, started nearly a year ago, keep dragging and tariffs are looming on lumber, steel, aluminium and possibly autos and automotive parts. Since Canadian interest rates remain among the lowest and the loonie continues to weaken, we see no reason not to hike. Now at 1.25%, the BoC’s policy interest rate will be increasing by a quarter percent to 1.50%. USD/CAD is up 4.7% in 2018: we would therefore expect the pair to head to 1.3170 after the BoC’s announcement.



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